UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file numbernumber: 0-5534
                                                                                September 30, 2017              0-5534

BALDWIN & LYONS, INC.PROTECTIVE INSURANCE CORPORATION
(Exact name of registrant as specified in its charter)

INDIANA
35-0160330
(State or other jurisdiction of
incorporation or organization)
35-0160330
(I.R.S. Employer
Identification Number)
111 Congressional Boulevard, Carmel, Indiana
46032
(Address of principal executive offices)
46032
(Zip Code)

Registrant's telephone number, including area code:  (317) 636-9800

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, No Par ValuePTVCAThe Nasdaq Stock Market LLC
Class B Common Stock, No Par ValuePTVCBThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    ✓       No___     No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ✓    No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer",filer," "accelerated filer",filer," "smaller reporting company"company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____   Accelerated filer   ✓  Non-accelerated filer ____
Smaller reporting company ____                 Emerging growth company ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____  No    ✓_

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of November 1, 2017:May 5, 2020:
Common Stock, No Par Value:                 Class A (voting)                                                                                                                                                    2,623,109
                                                            Class B (non-voting)                                                                                                                                          12,413,798
                                                                                                                                                                                                                                           15,036,907
Common Stock, No Par Value:
Class A (voting)
2,603,350
Class B (non-voting)
11,579,546
14,182,896
- 1 -

PART I – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS
Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Balance Sheets      
(in thousands, except share data)      
       
  September 30  December 31 
  2017  2016 
Assets      
Investments:      
   Fixed maturities $489,606  $491,904 
   Equity securities  194,167   119,945 
   Limited partnerships  69,568   76,469 
   Short-term and other  1,000   1,500 
   754,341   689,818 
         
Cash and cash equivalents  68,529   62,976 
Accounts receivable  80,112   64,984 
Reinsurance recoverable  307,239   255,024 
Other assets  81,655   78,732 
Current federal income taxes recoverable  5,680   2,603 
  $1,297,556  $1,154,137 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $656,006  $576,330 
Reserves for unearned premiums  40,059   21,694 
Short-term borrowings  20,000   20,000 
Accounts payable and other liabilities  162,144   120,356 
Deferred federal income taxes  14,417   11,412 
   892,626   749,792 
Shareholders' equity:        
   Common stock-no par value:        
   Class A voting -- authorized 3,000,000 shares;        
      outstanding -- 2017 - 2,623,109; 2016 - 2,623,109  112   112 
   Class B non-voting -- authorized 20,000,000 shares;        
      outstanding -- 2017 - 12,413,798; 2016 - 12,460,900  530   532 
   Additional paid-in capital  54,845   54,286 
   Unrealized net gains on investments  45,488   34,051 
   Foreign exchange adjustment  (321)  (831)
   Retained earnings  304,276   316,195 
   404,930   404,345 
  $1,297,556  $1,154,137 

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share data)

  
March 31
2020
  
December 31
2019
 
Assets      
Investments:
      
Fixed income securities $746,856  
$
795,538
 
Equity securities  70,320   
76,812
 
Limited partnerships  7,981   
23,292
 
Commercial mortgage loans  11,882   
11,782
 
Short-term and other  1,000   
1,000
 
   838,039   
908,424
 
         
Cash and cash equivalents  89,318   
67,851
 
Restricted cash and cash equivalents  10,813   
21,037
 
Accounts receivable  89,510   
111,762
 
Reinsurance recoverable  415,021   
432,067
 
Other assets  94,009   
86,306
 
Current federal income taxes recoverable  4,381   
4,878
 
Deferred federal income taxes  11,004   
2,035
 
         Total Assets
 $1,552,095  
$
1,634,360
 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $1,001,599  
$
988,305
 
Reserves for unearned premiums  70,686   
74,810
 
Reinsurance payable  47,562   
65,835
 
Short-term borrowings  20,000   
20,000
 
Accounts payable and other liabilities  106,865   
121,094
 
     Total Liabilities
  1,246,712   
1,270,044
 
         
Shareholders' equity:        
Common stock-no par value:        
Class A voting -- authorized 3,000,000 shares; outstanding -- 2020 - 2,603,350; 2019 - 2,603,350  111   
111
 
Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2020 - 11,579,546; 2019 - 11,675,956  495   
499
 
Additional paid-in capital  53,045   
53,349
 
Accumulated other comprehensive income (loss)  (12,179)  
9,369
 
Retained earnings  263,911   
300,988
 
     Total Shareholders' Equity
  305,383   
364,316
 
         Total Liabilities and Shareholders' Equity
 $1,552,095  
$
1,634,360
 

See notes to condensed consolidated financial statements.

- 2 -


Protective Insurance Corporation and Subsidiaries
Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Operations            
(in thousands, except per share data)            
             
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
Revenues            
Net premiums earned $89,100  $71,235  $231,070  $206,870 
Net investment income  4,027   3,513   12,434   10,501 
Commissions and other income  1,407   1,207   3,789   4,035 
Net realized gains on investments, excluding                
impairment losses  5,982   9,576   15,603   22,023 
Total other-than-temporary impairment losses on investments  (38)  (1,844)  (69)  (4,999)
Net realized gains on investments  5,944   7,732   15,534   17,024 
   100,478   83,687   262,827   238,430 
                 
Expenses                
Losses and loss expenses incurred  60,673   56,827   181,026   138,116 
Other operating expenses  29,187   21,225   82,185   64,326 
   89,860   78,052   263,211   202,442 
Income (loss) before federal income taxes (benefits)  10,618   5,635   (384)  35,988 
Federal income taxes (benefits)  3,184   1,634   (2,231)  11,906 
Net income $7,434  $4,001  $1,847  $24,082 
                 
Per share data:                
Basic and diluted earnings $.49  $.27  $.12  $1.60 
                 
    Dividends paid to shareholders $.27  $.26  $.81  $.78 
                 
Reconciliation of shares outstanding:                
   Average shares outstanding - basic  15,089   15,084   15,084   15,068 
   Dilutive effect of share equivalents  29   -   40   16 
   Average shares outstanding - diluted  15,118   15,084   15,124   15,084 

Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)

  
Three Months Ended
March 31
 
  2020  2019 
Revenues      
Net premiums earned $109,659  
$
110,013
 
Net investment income  7,236   
6,232
 
Commissions and other income  1,663   
2,064
 
Net realized losses on investments, excluding impairment losses  (4,787)  
(39
)
Impairment losses on investments  (40)  
(260
)
Net unrealized gains (losses) on equity securities and limited partnership investments  (22,929)  
6,327
 
Net realized and unrealized gains (losses) on investments  (27,756)  
6,028
 
   90,802   
124,337
 
         
Expenses        
Losses and loss expenses incurred  81,831   
87,122
 
Other operating expenses  34,110   
33,701
 
   115,941   
120,823
 
Income (loss) before federal income tax expense (benefit)  (25,139)  
3,514
 
Federal income tax expense (benefit)  (2,983)  
766
 
Net income (loss) $(22,156) 
$
2,748
 
         
Per share data:        
Basic and diluted earnings (loss) $(1.56) 
$
.18
 
         
Reconciliation of shares outstanding:        
Average shares outstanding - basic  14,169   
14,848
 
Dilutive effect of share equivalents  –   
30
 
Average shares outstanding - diluted  14,169   
14,878
 

See notes to condensed consolidated financial statements.

- 3 -

Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Comprehensive Income            
(in thousands)            
             
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
             
Net income $7,434  $4,001  $1,847  $24,082 
                 
Other comprehensive income (loss), net of tax:                
Unrealized net gains (losses) on securities:                
Unrealized net gains arising during the period  4,862   4,900   15,999   7,471 
Less: reclassification adjustment for net gains                
included in net income  2,240   2,164   4,562   8,985 
   2,622   2,736   11,437   (1,514)
                 
Foreign currency translation adjustments  57   (145)  510   398 
                 
Other comprehensive income (loss)  2,679   2,591   11,947   (1,116)
                 
Comprehensive income $10,113  $6,592  $13,794  $22,966 

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

  
Three Months Ended
March 31
 
  2020  2019 
Net income (loss)
 $(22,156) 
$
2,748
 
         
Other comprehensive income (loss), net of tax:        
Unrealized net gains (losses) on fixed income securities  (20,861)  
8,456
 
         
Foreign currency translation adjustments  (687)  
307
 
         
Other comprehensive income (loss)  (21,548)  
8,763
 
         
Comprehensive income (loss) $(43,704) 
$
11,511
 

See notes to condensed consolidated financial statements.

- 4 -


Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Statements of Cash Flows      
(in thousands)      
       
  Nine Months Ended 
  September 30 
  2017  2016 
       
Net cash provided by operating activities $55,235  $32,397 
Investing activities:        
   Purchases of available-for-sale investments  (305,130)  (310,398)
   Purchases of limited partnership interests  (897)  - 
   Proceeds from sales or maturities        
       of available-for-sale investments  257,977   286,580 
   Net sales of short-term investments  500   720 
   Distributions from limited partnerships  16,313   1,462 
   Other investing activities  (4,825)  (5,440)
Net cash used in investing activities  (36,062)  (27,076)
Financing activities:        
   Dividends paid to shareholders  (12,250)  (11,885)
   Repurchase of common shares  (1,880)  - 
Net cash used in financing activities  (14,130)  (11,885)
         
Effect of foreign exchange rates on cash and cash equivalents  510   398 
         
Increase (decrease) in cash and cash equivalents  5,553   (6,166)
Cash and cash equivalents at beginning of period  62,976   73,538 
Cash and cash equivalents at end of period $68,529  $67,372 
Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Shareholders' Equity
(in thousands)

  Common Stock  Additional  Accumulated Other       
  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  Equity 
Balance at December 31, 2019
  2,603  $111   11,676  $499  $53,349  $9,369  $300,988  $364,316 
Cumulative effect of the adoption of updated accounting guidance for credit losses, net of tax
  –   –   –   –   –   –   (12,281)  (12,281)
Net loss
  –   –   –   –   –   –   (22,156)  (22,156)
Foreign currency translation adjustment, net of tax
  –   –   –   –   –   (687)  –   (687)
Change in unrealized gain (loss) on investments, net of tax
  –   –   –   –   –   (20,861)  –   (20,861)
Common stock dividends
  –   –   –   –   –   –   (1,426)  (1,426)
Repurchase of common stock
  –   –   (127)  (5)  (563)  –   (1,214)  (1,782)
Restricted stock grants
  –   –   31   1   259   –   –   260 
Balance at March 31, 2020
  2,603  $111   11,580  $495  $53,045  $(12,179) $263,911  $305,383 


  Common Stock  Additional  Accumulated Other       
  Class A  Class B  Paid-in  Comprehensive  Retained  Total 
Description Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  Equity 
Balance at December 31, 2018
  
2,615
  
$
112
   
12,254
  
$
522
  
$
54,720
  
$
(7,347
)
 
$
308,075
  
$
356,082
 
Net income
  
–
   
–
   
–
   
–
   
–
   
–
   
2,748
   
2,748
 
Foreign currency translation adjustment, net of tax
  
–
   
–
   
–
   
–
   
–
   
307
   
–
   
307
 
Change in unrealized gain (loss) on investments, net of tax
  
–
   
–
   
–
   
–
   
–
   
8,456
   
–
   
8,456
 
Common stock dividends
  
–
   
–
   
–
   
–
   
–
   
–
   
(1,493
)
  
(1,493
)
Repurchase of common stock
  
–
   
–
   
(25
)
  
(1
)
  
(108
)
  
–
   
(359
)
  
(468
)
Restricted stock grants
  
–
   
–
   
20
   
1
   
437
   
–
   
–
   
438
 
Balance at March 31, 2019
  
2,615
  
$
112
   
12,249
  
$
522
  
$
55,049
  
$
1,416
  
$
308,971
  
$
366,070
 

See notes to condensed consolidated financial statements.

- 5 -

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

  
Three Months Ended
March 31
 
  2020  2019 
Operating activities      
Net income (loss) $(22,156) 
$
2,748
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities  20,844   
8,657
 
Net cash provided by (used in) operating activities  (1,312)  
11,405
 
         
Investing activities        
Purchases of fixed income and equity securities  (82,641)  
(140,645
)
Distributions from limited partnerships  14,636   
17,214
 
Proceeds from maturities  31,088   
16,776
 
Proceeds from sales of fixed income securities  48,552   
52,199
 
Proceeds from sales of equity securities  5,480   
9,169
 
Purchase of commercial mortgage loans  (368)  
(1,172
)
Proceeds from commercial mortgage loans  72   
–
 
Purchases of property and equipment  (369)  
(797
)
Net cash provided by (used in) investing activities  16,450   
(47,256
)
         
Financing activities        
Dividends paid to shareholders  (1,426)  
(1,493
)
Repurchase of common shares  (1,782)  
(468
)
Net cash used in financing activities  (3,208)  
(1,961
)
         
Effect of foreign exchange rates on cash and cash equivalents  (687)  
307
 
         
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents  11,243   
(37,505
)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period  88,888   
170,811
 
Cash, cash equivalents and restricted cash and cash equivalents at end of period $100,131  
$
133,306
 

See notes to condensed consolidated financial statements.

- 6 -

Notes to Unaudited Condensed Consolidated Financial Statements
(All dollar amounts presented in these notes are in thousands, except share and per share data)

(1)  Summary of Significant Accounting PoliciesPolicies:

Description of BusinessBusiness:  :  Baldwin & Lyons, Inc.Protective Insurance Corporation (the "Company"), based in Carmel, Indiana, is a specialty property-casualty insurer providingspecializing in marketing and underwriting property, liability and workers' compensation coverage for large to small-sized trucking and public transportation fleets.fleets, as well as coverage for trucking industry independent contractors.  The Company operates as one reportable property and casualty insurance segment, offeringoffers a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

The Company determined that its business constitutedoperates as one reportable property and casualty insurance segment as of January 1, 2017.  During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company'sits chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.

The prior period segment informationterm “Insurance Subsidiaries,” as used throughout this Quarterly Report on Form 10-Q was updateddocument, refers to conform to the current year presentation.Protective Insurance Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  Interim financial statements should be read in conjunction with the Company's annual audited financial statements and other disclosures included in the Company's most recent Annual Report on Form 10-K.  Operating results for interim periods are not necessarily indicative of results that may be expected for the year ending December 31, 20172020 or any other future period.

Accounting Policies

Investments: Carrying amounts for fixed maturityincome securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available.  Equity securities are carried at quoted market prices (fair value). 

Commercial mortgage loans are carried primarily at amortized cost along with an allowance for losses when necessary. These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans. The Company recorded an allowance of $195 on its commercial mortgage loans as of March 31, 2020 in conjunction with the adoption of the new credit losses accounting standard discussed below.  

The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership's net income.  To the extent that the limited partnership investeespartnerships include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its condensed consolidated statements of operations, its proportionate share of the investee's unrealized, as well as realized, investment gains or losses.losses within net unrealized gains (losses) on equity securities and limited partnership investments.

Short-term and other investments are carried at cost, which approximates their fair values.

Realized gains and losses on disposals of investments are recorded on the trade date and are determined by specific identification of cost of investments sold and are included in income.  All fixed maturity and equityFixed income securities are considered to be available-for-sale; theavailable-for-sale. The related unrealized net gains or losses (net of applicable tax effect)effects) on fixed income securities are reflected directly in other comprehensive income (loss) within shareholders' equity.  Included within available for saleavailable-for-sale fixed maturityincome securities are convertible debt securities.  A portion of the changes in the fair values of convertible debt securities areis reflected as a component of net realized losses on investments, excluding impairment losses within the condensed consolidated statements of operations.  Realized gains and losses on disposals of fixed income securities are recorded on the trade date.  Realized gains and losses on fixed income securities are determined by the specific identification of the cost of investments sold and are included in net realized losses on investments, excluding impairment losses.

Equity securities are recorded at fair value, with unrealized net gains or losses reflected as a component of net unrealized gains (losses) on investments.equity securities and limited partnership investments within the condensed consolidated statements of operations.  Realized gains and losses on disposals of equity securities are recorded on the trade date and included in net realized losses on investments, excluding impairment losses. 

Recognition of Revenue and Costs:  Premiums are earned over the period for which insurance protection is provided.  A reserve for unearned premiums is established to reflect amounts applicable to subsequent accounting periods.  Commissions to unaffiliated companies and premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned.  The Company does not defer acquisition costs that are not directly variable with the production of premiums.  If it is determined that expected losses and deferred expenses will likely exceed the related unearned premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to reflect any such premium deficiency.  In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a corresponding expense to current operations for the amount of the excess premium deficiency.  Anticipated investment income is considered in determining recoverability of deferred acquisition costs.  The Company had no material contract assets, contract liabilities, or deferred contract costs recorded on its condensed consolidated balance sheet at March 31, 2020.

- 67 -
NotesThe following accounting policies have been updated effective January 1, 2020 to Unaudited Condensed Consolidated Financial Statements (continued)
In accordance withreflect the FinancialCompany's adoption of Accounting Standards Board'sUpdate ("FASB"ASU") other-than-temporary impairment guidance, ifNo. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13,as described below.

Investment Impairments:  For a fixed maturityincome security is in an unrealized loss position andwhere the Company has the intent to sell the fixed maturityincome security, or it is more likely than not that the Company will have to sell the fixed maturityincome security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realizedwithin impairment losses on investments in the condensed consolidated statements of operations.  The new cost basis of the investment is the previous amortized cost basis less the impairment recognized.  The new cost basis is not adjusted for any subsequent recoveries in fair value.

For impaireda fixed maturity securitiesincome security that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, butthe security, the Company expects that it will not fully recoverseparates the amortized cost basis, the credit loss component of the other-than-temporary impairment is recognized infrom the amount related to all other factors and reports the credit loss component within net realized losses on investments, excluding impairment losses in the condensed consolidated statements of operationsoperations.  The impairment related to all other factors (non-credit factors) is reported in other comprehensive income (loss). The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the non-credit componentcost basis is not adjusted.

The Company considers the extent to which fair value is below amortized cost in determining whether a credit-related loss exists. The Company also considers the credit quality rating of the other-than-temporary impairment is recognized directly in shareholders' equity (accumulated other comprehensive income).

security, focusing on those below investment grade, with emphasis on securities downgraded below investment grade.  The credit component of an other-than-temporary impairmentloss is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturityincome security.  The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the appropriate effective interest rate.

The unrealized net gains or losses (net of applicable tax effect) related to equity securities are reflected directly in shareholders' equity, unless a decline in value is determined to be other-than-temporary, in which case the loss is charged to income.  In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost.   For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, or where that decline has existed for a period of at least one year, the decline is treated as an other-than-temporary impairment.  Additionally, the Company takes into account any known subjective information in evaluating for impairment, separate from considerationmay conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the Company's quantitative criteria defined above, as well asexpected cash flows equals or exceeds a security’s amortized cost.

The Company reports investment income due and accrued separately from available-for-sale fixed income securities and has elected not to measure an allowance for credit losses for investment income due and accrued. Investment income due and accrued is written off through net realized losses on investments, excluding impairment losses at the Company's intent and abilitytime the issuer defaults or is expected to retain the equity security for a period of time sufficient to allow for such recovery in fair value.default on payments.

- 7 -Deductible Receivables
: Under certain workers’ compensation insurance contracts with deductible features, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a net of allowance basis in the condensed consolidated balance sheets within accounts receivable.  The allowance is based upon the Company’s ongoing review of amounts outstanding, changes in policyholder credit standing, and other relevant factors.  A probability-of-default methodology, which reflects current and forecasted economic conditions, is used to estimate the allowance for expected credit losses for deductible receivables.  As of January 1, 2020, in conjunction with the adoption of ASU 2016-13, the Company recorded an allowance for expected credit losses of $15,000 ($11,850, net of tax). See Note 10 – Litigation, Commitments and Contingencies for further discussion.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

RecentRecently Adopted Accounting Pronouncements: In May 2014,Effective January 1, 2019, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's service and fee income, other than that directly associated with insurance contracts, will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the quarter ending March 31, 2018. The Company has performed an evaluation of the impact this guidance will have on its results of operations, financial position and liquidity as well as a technical assessment of material customer contracts.  The Company will use the modified retrospective method upon adoption in 2018.  The Company does not expect the new standard to have a material impact on its condensed consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature are recognized in accumulated other comprehensive income as a component of shareholders' equity. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017.  The effect of this guidance will be dependent on the unrealized gains or losses associated with the Company's equity investments.  Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment with future unrealized gains or losses recognized in the statement of operations.  Refer to Note 2 for unrealized gains and losses currently recognized in other comprehensive income (loss).
In February 2016, the FASB issuedadopted ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02.  Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will beare required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis.  Concurrently, lessees will beare required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018.  EarlyThe Company's adoption is permitted, but the Company plans to adopt this ASU on January 1, 2019.  This guidance is required to be applied using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements.  The Company is currently evaluating the effects that adoption of ASU 2016-02 willnew standard did not have any impact on its condensed consolidated financial statements.statements of operations or cash flows; however, the impact of adopting the new guidance resulted in a right-of-use asset and a lease liability being recorded on the condensed consolidated balance sheet as of March 31, 2020, each of approximately $94, which are included within other assets and accounts payable and other liabilities. 
- 8 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No.2016-13.  ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This update introducesintroduced a current expected credit loss ("CECL") model for measuring expected credit losses for certain types of financial instruments held at the reporting date requiring significant judgment in application based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replacesforecasts, but is not prescriptive about certain aspects of estimating expected losses.  The guidance replaced the current incurred loss model for measuring expected credit losses requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and providesprovided for additional disclosure requirements.  Subsequently, the FASB issued additional ASUs on Topic 326 that did not change the core principle of the guidance in ASU 2016-2016-13, but provided clarification and implementation guidance on certain aspects of ASU 2016-13, and have the same effective date and transition requirements as ASU 2016-13.  The Company adopted the guidance using a modified retrospective approach as of January 1, 2020 and recognized a cumulative effect adjustment of $15,545 ($12,281, net of tax), to the opening balance of retained earnings.  The adjustment was primarily related to estimating credit losses on the Company’s accounts receivable balances, reinsurance recoverable balances and commercial mortgage loans at the date of adoption.
13
- 8 -
The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment ("OTTI") model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.  The Company adopted the guidance related to available-for-sale fixed income securities on January 1, 2020 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior to the effective date.  The effect of the prospective transition approach was to maintain the same amortized cost basis before and after the effective date.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13.  This update removed the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removed disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update added disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. The Company adopted ASU 2018-13 as of January 1, 2020.  As the requirements of this guidance are applicable to disclosure only, the adoption of ASU 2018-13 had no material impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements:  In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12.  Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods.  An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates.  Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective.  This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate.  Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis.  However, current guidance provides an exception that when a loss in an interim period exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year.  ASU 2019-12 removes this exception and provides that in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate.  ASU 2019-12 is effective for interim and annual reporting periodsfiscal years beginning after December 15, 2019, with early2020, including interim periods within those annual periods.  Early adoption permitted for interim and annual reporting periods beginning after December 15,
2018. is permitted.  The Company is currently evaluating the effects thatthe adoption of ASU 2016-132019-12 will have on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04.  This amendment removes Step 2 of the goodwill impairment test under current guidance.  The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value.  ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted.  The Company does not expect the guidance to have a material impact on its condensed consolidated financial statements.

- 9 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(2)  Investments:

(2) Investments:
The following is a summary of available-for-sale securities at September 30, 2017March 31, 2020 and December 31, 2016:2019:

              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
September 30, 2017               
Fixed maturities               
   Agency collateralized mortgage obligations  $11,017   $10,390   $636   $(9)  $627 
   Agency mortgage-backed securities  19,712   19,667   92   (47)  45 
   Asset-backed securities  50,030   48,969   1,133   (72)  1,061 
   Bank loans  24,986   24,914   182   (110)  72 
   Certificates of deposit  3,138   3,125   13   -   13 
   Collateralized mortgage obligations  7,055   6,625   470   (40)  430 
   Corporate securities  165,794   164,965   2,109   (1,280)  829 
   Mortgage-backed securities  20,643   19,534   1,508   (399)  1,109 
   Municipal obligations  102,805   102,272   744   (211)  533 
   Non-U.S. government obligations  32,942   33,399   512   (969)  (457)
   U.S. government obligations  51,484   51,766   20   (302)  (282)
      Total fixed maturities  489,606   485,626   7,419   (3,439)  3,980 
Equity securities:                    
   Consumer  41,913   19,749   22,728   (564)  22,164 
   Energy  8,168   5,454   2,795   (81)  2,714 
   Financial  42,596   29,780   13,213   (397)  12,816 
   Industrial  23,972   7,825   16,293   (146)  16,147 
   Technology  11,825   5,452   6,373   -   6,373 
   Mutual fund  58,178   55,025   3,163   (10)  3,153 
   Other  7,515   4,881   2,757   (123)  2,634 
      Total equity securities  194,167   128,166   67,322   (1,321)  66,001 
                     
      Total $683,773  $613,792  $74,741  $(4,760)  69,981 
                     
              Applicable federal income taxes   (24,493)
                     
              Net unrealized gains - net of tax  $45,488 
  
Fair
Value
  
Cost or
Amortized Cost
  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
March 31, 2020               
Fixed income securities
               
Agency collateralized mortgage obligations $10,460  $11,016  $390  $(946) $(556)
Agency mortgage-backed securities  58,619   55,675   2,950   (6)  2,944 
Asset-backed securities  93,369   107,774   237   (14,642)  (14,405)
Bank loans  10,187   12,455   –   (2,268)  (2,268)
Certificates of deposit  2,835   2,835   –   –   – 
Collateralized mortgage obligations  4,076   4,327   19   (270)  (251)
Corporate securities  262,160   263,356   4,682   (5,878)  (1,196)
Mortgage-backed securities  47,993   53,697   74   (5,778)  (5,704)
Municipal obligations  39,132   38,474   916   (258)  658 
Non-U.S. government obligations  28,842   27,992   850   –   850 
U.S. government obligations  189,183   179,850   9,333   –   9,333 
Total fixed income securities $746,856  $757,451  $19,451  $(30,046) $(10,595)



- 10 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
December 31, 2016               
Fixed maturities               
   Agency collateralized mortgage obligations $6,171  $6,000  $171  $-  $171 
   Agency mortgage-backed securities  4,770   4,751   57   (38)  19 
   Asset-backed securities  45,183   45,207   458   (482)  (24)
   Bank loans  10,349   10,222   149   (22)  127 
   Certificates of deposit  3,117   3,126   -   (9)  (9)
   Collateralized mortgage obligations  9,104   9,096   290   (282)  8 
   Corporate securities  142,683   143,356   1,643   (2,316)  (673)
   Mortgage-backed securities  24,571   23,904   1,132��  (465)  667 
   Municipal obligations  129,335   130,204   391   (1,260)  (869)
   Non-U.S. government obligations  24,681   26,461   230   (2,010)  (1,780)
   U.S. government obligations  91,940   92,234   74   (368)  (294)
      Total fixed maturities  491,904   494,561   4,595   (7,252)  (2,657)
Equity securities:                    
   Consumer  32,576   15,231   17,656   (311)  17,345 
   Energy  12,842   5,641   7,203   (2)  7,201 
   Financial  31,186   22,417   8,998   (229)  8,769 
   Industrial  21,145   6,239   15,098   (192)  14,906 
   Technology  8,858   4,117   4,769   (28)  4,741 
   Mutual fund  6,995   6,930   121   (56)  65 
   Other  6,343   4,327   2,181   (165)  2,016 
      Total equity securities  119,945   64,902   56,026   (983)  55,043 
                     
      Total $611,849  $559,463  $60,621  $(8,235)  52,386 
                     
              Applicable federal income taxes   (18,335)
                     
              Net unrealized gains - net of tax  $34,051 



- 11 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
  
Fair
Value
  
Cost or
Amortized Cost
  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  
Net Unrealized
Gains (Losses)
 
December 31, 2019               
Fixed income securities
               
Agency collateralized mortgage obligations 
$
12,093
  
$
11,557
  
$
536
  
$
–
  
$
536
 
Agency mortgage-backed securities  
56,280
   
54,286
   
2,005
   
(11
)
  
1,994
 
Asset-backed securities  
106,397
   
107,028
   
499
   
(1,130
)
  
(631
)
Bank loans  
14,568
   
14,932
   
106
   
(470
)
  
(364
)
Certificates of deposit  
2,835
   
2,835
   
–
   
–
   
–
 
Collateralized mortgage obligations  
5,616
   
5,123
   
493
   
–
   
493
 
Corporate securities  
281,381
   
274,340
   
7,492
   
(451
)
  
7,041
 
Mortgage-backed securities  
47,463
   
46,685
   
1,047
   
(269
)
  
778
 
Municipal obligations  
36,286
   
35,749
   
684
   
(147
)
  
537
 
Non-U.S. government obligations  
24,179
   
23,889
   
290
   
–
   
290
 
U.S. government obligations  
208,440
   
206,623
   
2,891
   
(1,074
)
  
1,817
 
Total fixed income securities 
$
795,538
  
$
783,047
  
$
16,043
  
$
(3,552
)
 
$
12,491
 

The following table summarizes, for available-for-sale fixed maturity and equity security investmentsincome securities in an unrealized loss position at September 30, 2017March 31, 2020 and  December 31, 2016, respectively,2019, the aggregate fair value and gross unrealized loss categorized by the duration individual securities have been continuously in an unrealized loss position.

  March 31, 2020  December 31, 2019 
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
  
Number of
Securities
  
Fair
Value
  
Gross
Unrealized Loss
 
Fixed income securities:
                  
12 months or less  270  $225,745  $(25,029)  
88
  
$
108,387
  
$
(2,452
)
Greater than 12 months  20   20,410   (5,017)  
69
   
66,860
   
(1,100
)
Total fixed income securities  290  $246,155  $(30,046)  
157
  
$
175,247
  
$
(3,552
)
                         

  September 30, 2017  December 31, 2016 
  Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss 
Fixed maturity securities:                  
12 months or less  325  $233,926  $(1,999)  397  $291,048  $(4,380)
Greater than 12 months  47   25,633   (1,440)  54   32,054   (2,872)
Total fixed maturities  372   259,559   (3,439)  451   323,102   (7,252)
                         
Equity securities:                        
12 months or less  36   33,213   (1,321)  35   20,698   (983)
Greater than 12 months  -   -   -   -   -   - 
Total equity securities  36   33,213   (1,321)  35   20,698   (983)
Total fixed maturity and equity securities  408  $292,772  $(4,760)  486  $343,800  $(8,235)

- 10 -

The fair value and the cost or amortized costs of fixed maturityincome investments at September 30, 2017,March 31, 2020, organized by contractual maturity, are shown below.  Actual maturities may ultimately differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.



  Fair Value  Cost or Amortized Cost 
       
One year or less $47,563  $47,558 
Excess of one year to five years  272,390   272,639 
Excess of five years to ten years  60,122   59,322 
Excess of ten years  3,486   3,338 
   Contractual maturities  383,561   382,857 
Asset-backed securities  106,045   102,769 
Total $489,606  $485,626 


- 12 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
  
Fair
Value
  
Cost or
Amortized Cost
 
One year or less 
$
97,469
  
$
96,889
 
Excess of one year to five years  
293,569
   
289,041
 
Excess of five years to ten years  
132,550
   
130,161
 
Excess of ten years  
12,828
   
13,198
 
Contractual maturities  
536,416
   
529,289
 
Asset-backed securities  
210,440
   
228,162
 
Total 
$
746,856
  
$
757,451
 

Following is a summary of the components of net realized and unrealized gains (losses) on investments for the periods presented in the accompanying condensed consolidated statements of operations.

  
Three Months Ended
March 31
 
  2020  2019 
       
Gross gains on available-for-sale fixed income securities during the period
 $2,652  
$
3,171
 
Gross losses on available-for-sale fixed income securities during the period  (4,741)  
(3,527
)
         
Impairment losses on investments  (40)  
(260
)
         
Change in value of limited partnership investments  (676)  
408
 
         
Gains (losses) on equity securities:        
Realized gains (losses) on equity securities sold during the period  (2,698)  
317
 
Unrealized gains (losses) on equity securities held at the end of the period  (22,253)  
5,919
 
Realized and unrealized gains (losses) on equity securities during the period  (24,951)  
6,236
 
         
Net realized and unrealized gains (losses) on investments $(27,756) $6,028 


  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
Fixed maturities:            
   Gross gains $3,852  $7,496  $9,544  $9,338 
   Gross losses  (4,011)  (8,434)  (10,160)  (12,470)
      Net realized losses  (159)  (938)  (616)  (3,132)
                 
Equity securities:                
   Gross gains  4,103   5,086   8,601   21,722 
   Gross losses  (498)  (819)  (966)  (4,767)
      Net realized gains  3,605   4,267   7,635   16,955 
                 
Limited partnerships - net gain  2,498   4,403   8,515   3,201 
                 
                 
      Total net gains $5,944  $7,732  $15,534  $17,024 



Net realized gains activityAs discussed in Note 1, the Company adopted the provisions of the new CECL model for investments,measuring expected credit losses for available-for-sale fixed income securities as shownof January 1, 2020.  The updated guidance amended the previous OTTI model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account on the balance sheet with a corresponding adjustment to earnings and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  As of March 31, 2020, the Company intended to sell one security in an unrealized loss position and, in accordance with the new guidance, recorded $40 of a write down to earnings.  The Company reviewed its remaining fixed income securities in an unrealized loss position as of March 31, 2020 and determined that the losses were primarily the result of non-credit factors, such as the increase in market volatility due to the recent disruption in global financial markets as a result of the novel coronavirus COVID-19 pandemic and responses to it.  The Company currently does not intend to sell nor does it expect to be required to sell these securities before recovery of their amortized cost.  Based on the above factors, the Company did not record any allowance for credit losses related to its available-for-sale securities under the new guidance in the previous table, are further detailed as follows:


  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
             
Realized net gains on the disposal of securities $3,244  $3,482  $5,886  $10,649 
Mark-to-market adjustment  171   108   136   (326)
Equity in gains of limited partnership                
  investments - realized and unrealized  2,498   4,403   8,515   3,201 
Impairment:                
  Write-downs based upon objective criteria  (38)  (1,844)  (69)  (4,999)
  Recovery of prior write-downs                
    upon sale or disposal  69   1,583   1,066   8,499 
                 
Total net gains $5,944  $7,732  $15,534  $17,024 

The mark-to-market adjustments in the table above represent the changes in fair valuefirst quarter of options embedded in convertible debt securities held by the Company.2020.

Shareholders' equity at September 30, 2017March 31, 2020 included approximately $30,293,$4,453, net of federal income taxes,tax expense, of reported earnings whichthat remain undistributed by limited partnerships.


- 1311 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(3)  Reinsurance:

At September 30, 2017, limited partnership investments included approximately $40,169 invested in two partnerships which are managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners.  Each of these investments contains profit sharing agreements, pursuant to which a portion of the gains will be paid to the affiliated organizations.

The Company's limited partnerships include one investment which primarily invests in public and private equity markets in India.  The limited partnership investment's value as of September 30, 2017 and 2016 was $26,970 and $29,718, respectively.  At September 30, 2017, the Company's estimated ownership interest in this limited partnership investment was approximately 5%.  The Company's share of earnings from this limited partnership investment was $4,817 and $1,448 for the nine months ended September 30, 2017 and 2016, respectively.

The summarized financial information of the partnership in which the Company has invested is as follows:

  As of and for the 
  Nine Months Ended 
  September 30 
  2017  2016 
Total assets $517,411  $487,784 
Total partners' capital  517,411   487,784 
Net increase in partners' capital resulting from operations  95,314   23,841 


At September 30, 2017, the Company's invested assets, excluding limited partnership investments, included approximately $24,229 in portfolios managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners.

(3) Reinsurance:
The following table summarizes the Company's transactions with reinsurers for the 2017three months ended March 31, 2020 and 20162019 comparative periods.

  2017  2016 
Three months ended September 30:      
   Premiums ceded to reinsurers $34,025  $30,996 
   Losses and loss expenses        
      ceded to reinsurers  30,531   21,237 
   Commissions from reinsurers  7,205   11,898 
         
Nine months ended September 30:        
   Premiums ceded to reinsurers $111,124  $94,331 
   Losses and loss expenses        
      ceded to reinsurers  102,401   70,081 
   Commissions from reinsurers  21,000   32,587 
  2020  2019 
Three months ended March 31:      
Premiums ceded to reinsurers $28,467  
$
30,173
 
Losses and loss expenses ceded to reinsurers  23,536   
30,789
 
Commissions from reinsurers  7,528   
7,233
 
         

- 14 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(4)  Loss and Loss Expense Reserves:

Activity in the reserves for losses and loss expenses for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 is summarized as follows.  All amounts are shown net of reinsurance, unless otherwise indicated.

 2017  2016  Three Months Ended 
Reserves, gross of reinsurance      
recoverable, at the beginning of the year $576,330  $513,596 
 March 31 
 2020  2019 
Reserves, gross of reinsurance recoverable, at the beginning of the year
 $988,305  
$
865,339
 
Reinsurance recoverable on unpaid losses at the beginning of the year  251,563   211,843   398,305   
375,935
 
Reserves at the beginning of the year  324,767   301,753  590,000  
489,404
 
              
Provision for losses and loss expenses:              
Claims occurring during the current period  164,546   129,404  81,839  
88,180
 
Claims occurring during prior periods  16,480   8,712   (8)  
(1,058
)
Total incurred  181,026   138,116  81,831  
87,122
 
              
Loss and loss expense payments:              
Claims occurring during the current period  41,616   30,932  8,169  
8,708
 
Claims occurring during prior periods  109,616   81,427   61,812   
56,747
 
Total paid  151,232   112,359   69,981   
65,455
 
Reserves at the end of the period  354,561   327,510  601,850  
511,071
 
              
Reinsurance recoverable on unpaid losses at the end of the period  301,445   238,049   399,749   
383,150
 
Reserves, gross of reinsurance        
recoverable, at the end of the period $656,006  $565,559 
Reserves, gross of reinsurance recoverable, at the end of the period $1,001,599  
$
894,221
 

The table above shows$8 prior accident year favorable development during the three months ended March 31, 2020 was primarily due to favorable loss development in independent contractor coverages.  This savings compares to a roll-forwardprior accident year savings of $1,058 for the three months ended March 31, 2019, which related to favorable loss development in workers' compensation and loss expense reserves from the prior year end to the current balance sheet date with comparable prior year information.independent contractor coverages.  Losses incurred from claims occurring during prior years reflectsreflect the development from prior accident years, composed of individual claim savings and deficiencies which, in the aggregate, have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in estimates of losses incurred but not reported.

The $16,480 prior accident year deficiency that developed duringreported as part of the first nine months of 2017 was largely due to infrequent, but severe, transportation losses that occurred primarily during the first six months of 2017.  This 2017 deficiency compares to a deficiency of $8,712 for the first nine months of 2016 that arose due mostly to management's review of reserve positions related to discontinued lines.normal reserving process.


- 15 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(5)  Segment Information:Information:

The Company has one reportable business segment in its operations: Property and Casualty Insurance.  The property and casualty insurance segment provides multiple lines of insurance coverage primarily to fleet transportationcommercial automobile companies, as well as to independent contractors who contract with fleet transportationcommercial automobile companies. In addition, the Company provides workers' compensation coverage for a variety of classes outside the transportation industry.

- 12 -
The following table summarizes segment revenues for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:

 Three Months Ended  Nine Months Ended 
 September 30  September 30 
 2017  2016  2017  2016  
Three Months Ended
March 31
 
             2020  2019 
Revenues:                  
Net premiums earned $89,100  $71,235  $231,070  $206,870  $109,659  
$
110,013
 
Net investment income  4,027   3,513   12,434   10,501  7,236  
6,232
 
Net realized gains on investments  5,944   7,732   15,534   17,024 
Net realized and unrealized gains (losses) on investments (27,756) 
6,028
 
Commissions and other income  1,407   1,207   3,789   4,035   1,663   
2,064
 
Total revenues $100,478  $83,687  $262,827  $238,430  $90,802  
$
124,337
 


(6)  Debt:Debt:
The
On August 9, 2018, the Company maintainsentered into a credit agreement providing a revolving line of credit facility with a $40,000 limit, andwith the option for up to an additional $35,000 in incremental loans at the discretion of the lenders.  This credit agreement has an expiration date of September 23, 2018.August 9, 2022.  Interest on this line ofrevolving credit facility is referenced to LIBORthe London Interbank Offered Rate and can be fixed for periods of up to one year at the Company's option.  Outstanding drawings on this line ofrevolving credit facility were $20,000 as of both September 30, 2017 and DecemberMarch 31, 2016.2020.  At September 30, 2017,March 31, 2020, the effective interest rate was 2.34%.  The2.03%, and the Company hashad $20,000 remaining and unusedavailable under the line ofrevolving credit at September 30, 2017.facility.  The current outstanding borrowings were used for general corporate purposes. to repay the Company's previous line of credit.  The Company's revolving credit facility has two financial covenants, each of which were met as of March 31, 2020.  These covenants require the Company to have a minimum U.S. generally accepted accounting principles net worth and a maximum consolidated debt to equity ratio of 0.35.


(7)  Taxes:

The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company’s best estimate of the effective tax rate expected for the full year based on projected annual taxable income (loss).  The effective tax rate can fluctuate throughout the year because estimates used in the quarterly tax provision are updated as more information becomes available throughout the year.

The effective federal tax rate on consolidated loss for the three months ended March 31, 2020 was 11.9% compared to 21.8% on consolidated income for the three months ended March 31, 2019.  The pre-tax loss for the three months ended March 31, 2020 makes these interim period effective tax rates less comparable year over year.  The difference in the effective federal income tax rate from the normal statutory rate was primarily related to the recording of a valuation allowance in the current period on our deferred tax assets discussed below, in addition to the effects of tax-exempt investment income and the dividends received deduction.

In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or availability to carryback the losses to taxable income during the periods in which those temporary differences become deductible.  The Company considered several factors when analyzing the need for a valuation allowance including the Company's current three year cumulative loss through March 31, 2020, the increase in deferred tax assets due to the adoption of CECL at January 1, 2020 discussed in Note 1, the change in unrealized gains and losses and the loss of a high taxable income year from the carryback period.  The three year cumulative loss limits the Company's ability to use projected income beyond 2020 in the analysis.  Based on this analysis, the Company has concluded that a valuation allowance is necessary for its deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences and recorded a valuation allowance of $4,929 for the three months ended March 31, 2020, of which $2,306 was recorded in the condensed consolidated statement of operations and the balance was recorded in shareholders' equity within accumulated other comprehensive income (loss).  The Company recognized this allowance entirely in the first quarter of 2020 as it relates to realized and unrealized capital losses during the quarter that are treated as a discrete item.

As of September 30, 2017,March 31, 2020, the Company's calendar years 2018, 2017 and 2016 2015 and 2014 remainremain subject to examination by the Internal Revenue Service.

The effective federal tax rate on consolidated income for the third quarter of 2017 was 30.0% compared to 29.0% for the 2016 third quarter.  The effective federal income tax rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

The effective federal tax rate on consolidated income (loss) for the first nine months of 2017 was 581.0% compared to 33.1% for the 2016 period.  The significant difference between the effective rate and the normal statutory rate was the result of the Company's operating loss through the first nine months of 2017.


- 1613 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(8)  Fair Value:

(8) Fair Value:
Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:

As of September 30, 2017:            
             
Description Total  Level 1  Level 2  Level 3 
             
Fixed maturities:            
Agency collateralized mortgage obligations $11,017  $-  $11,017  $- 
Agency mortgage-backed securities  19,712   -   19,712   - 
Asset-backed securities  50,030   -   50,030   - 
Bank loans  24,986   -   24,986   - 
Certificates of deposit  3,138   3,138   -   - 
Collateralized mortgage obligations  7,055   -   7,055   - 
Corporate securities  160,716   -   160,558   158 
Options embedded in convertible securities  5,078   -   5,078   - 
Mortgage-backed securities  20,643   -   20,413   230 
Municipal obligations  102,805   -   102,805   - 
Non-U.S. government obligations  32,942   -   32,942   - 
U.S. government obligations  51,484   -   51,484   - 
      Total fixed maturities  489,606   3,138   486,080   388 
Equity securities:                
Consumer  41,912   41,912   -   - 
Energy  8,168   8,168   -   - 
Financial  46,167   46,167   -   - 
Industrial  23,971   23,971   -   - 
Technology  11,826   11,826   -   - 
Mutual fund  53,528   53,528   -   - 
Other  8,595   8,595   -   - 
      Total equity securities  194,167   194,167   -   - 
Short-term  1,000   1,000   -   - 
Cash equivalents  64,153   -   64,153   - 
Total $748,926  $198,305  $550,233  $388 

As of March 31, 2020:



Description Total  Level 1  Level 2  Level 3 
Fixed income securities:            
Agency collateralized mortgage obligations $10,460  $–  $10,460  $– 
Agency mortgage-backed securities  58,619   –   58,619   – 
Asset-backed securities  93,369   –   93,369   – 
Bank loans  10,187   –   10,187   – 
Certificates of deposit  2,835   2,835   –   – 
Collateralized mortgage obligations  4,076   –   4,076   – 
Corporate securities  259,528   –   259,528   – 
Options embedded in convertible securities  2,632   –   2,632   – 
Mortgage-backed securities  47,993   –   47,993   – 
Municipal obligations  39,132   –   39,132   – 
Non-U.S. government obligations  28,842   –   28,842   – 
U.S. government obligations  189,183   –   189,183   – 
Total fixed income securities  746,856   2,835   744,021   – 
Equity securities:                
Consumer  11,880   11,880   –   – 
Energy  1,508   1,508   –   – 
Financial  22,092   22,092   –   – 
Industrial  3,707   3,707   –   – 
Technology  2,963   2,963   –   – 
Funds (e.g., mutual funds, closed end funds, ETFs)  21,837   21,837   –   – 
Other  6,333   6,333   –   – 
Total equity securities
  70,320   70,320   –   – 
Short-term investments  1,000   1,000   –   – 
Cash equivalents  69,527   –   69,527   – 
Total $887,703  $74,155  $813,548  $– 

- 1714 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)As of December 31, 2019:


As of December 31, 2016:            
            
Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
            
Fixed maturities:            
Fixed income securities:            
Agency collateralized mortgage obligations $6,171  $-  $6,171  $-  
$
12,093
  
$
–
  
$
12,093
  
$
–
 
Agency mortgage-backed securities  4,770   -   4,770   -  
56,280
  
–
  
56,280
  
–
 
Asset-backed securities  45,183   -   37,919   7,264  
106,397
  
–
  
106,397
  
–
 
Bank loans  10,349   -   -   10,349  
14,568
  
–
  
14,568
  
–
 
Certificates of deposit  3,117   3,117   -   -  
2,835
  
2,835
  
–
  
–
 
Collateralized mortgage obligations  9,104   -   6,409   2,695  
5,616
  
–
  
5,616
  
–
 
Corporate securities  137,932   -   135,794   2,138  
276,087
  
–
  
276,087
  
–
 
Options embedded in convertible securities  4,751   -   4,751   -  
5,294
  
–
  
5,294
  
–
 
Mortgage-backed securities  24,571   -   22,206   2,365  
47,463
  
–
  
47,463
  
–
 
Municipal obligations  129,335   -   129,190   145  
36,286
  
–
  
36,286
  
–
 
Non-U.S. government obligations  24,681   -   24,419   262  
24,179
  
–
  
24,179
  
–
 
U.S. government obligations  91,940   -   91,940   -   
208,440
   
–
   
208,440
   
–
 
Total fixed maturities  491,904   3,117   463,569   25,218 
Total fixed income securities 
795,538
  
2,835
  
792,703
  
–
 
Equity securities:                            
Consumer  32,576   32,576   -   -  
16,707
  
16,707
  
–
  
–
 
Energy  12,842   12,842   -   -  
3,074
  
3,074
  
–
  
–
 
Financial  31,186   30,943   243   -  
31,577
  
31,577
  
–
  
–
 
Industrial  21,145   20,262   883   -  
4,927
  
4,927
  
–
  
–
 
Technology  8,858   8,858   -   -  
2,817
  
2,817
  
–
  
–
 
Mutual fund  6,995   -   6,995   - 
Funds (e.g., mutual funds, closed end funds, ETFs) 
9,460
  
9,460
  
–
  
–
 
Other  6,343   6,343   -   -   
8,250
   
8,250
   
–
   
–
 
Total equity securities  119,945   111,824   8,121   -  
76,812
  
76,812
  
–
  
–
 
Short-term  1,500   1,500   -   - 
Short-term investments 
1,000
  
1,000
  
–
  
–
 
Cash equivalents  59,683   -   59,683   -   
59,780
   
–
   
59,780
   
–
 
Total $673,032  $116,441  $531,373  $25,218  
$
933,130
  
$
80,647
  
$
852,483
  
$
–
 

Level inputs, as defined by the FASB guidance, are as follows:

Level Input: Input Definition:
   
Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
   
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
   
Level 3 Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.


- 18 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The Company'sCompany did not have any Level 3 assets consist primarily of a portfolio of corporate and mortgage-backed securities.  Theat March 31, 2020 or December 31, 2019.  Level 3 assets, when present, are valued using various unobservable inputs, including extrapolated data, proprietary models and indicative quotes. Transfers into Level 3 relate to securities previously classified as Level 2.  A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the nine months ended September 30, 2017 and for the year ended December 31, 2016:

  2017  2016 
Beginning of period balance $25,218  $16,793 
Total gains (realized or unrealized)        
included in income  316   1,846 
Purchases  81   5,540 
Settlements  (8,950)  (8,791)
Transfers into Level 3  144   10,202 
Transfers out of Level 3  (16,421)  (372)
End of period balance $388  $25,218 

Quoted market prices are obtained whenever possible.  Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques.broker/dealer quotes for specific securities.  These techniques are significantly affected by the Company's assumptions, including discount rates and estimates of future cash flows.  Potential taxes and other transaction costs have not been considered in estimating fair values.

Transfers between levels, if any, are recorded as of the beginning of the reporting period.  There were no materialsignificant transfers of assets between Level 1 and Level 2 during the ninethree months ended September 30, 2017 and 2016.  The transfers out of Level 3 during the third quarter of 2017 consisted mainly of bank loans, asset-backed securities and certain mortgage-backed securities and corporate securities, which were based on quoted market prices of similar securities and other observable inputs.March 31, 2020.

In addition to the preceding disclosures on assets recorded at fair value in the condensed consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the condensed consolidated balance sheets.

Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures.  Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company.  The following methods, assumptions and inputs were used to estimate the fair value of limited partnerships and short-term borrowings.each class of financial instrument:

- 15 -
Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership's equity.   The underlying assets of the Company's investments in limited partnerships are carried primarily at fair value, and,value; therefore, the Company's carrying value of limited partnerships approximates fair value.  As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.

- 19 -
Notes to Unaudited Condensed Consolidated Financial Statements (continued)Commercial mortgage loans:  Commercial mortgage loans are carried primarily at amortized cost along with a valuation allowance for losses when necessary. These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans.  The fair value of the Company’s investment in these commercial mortgage loans is based on expected future cash flows discounted at the current interest rate for origination of similar quality loans, adjusted for specific loan risk.  These investments are classified as Level 3.

Short-term borrowings: The fair value of the Company's short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current market interest rates available to the Company for debt of similar terms and remaining maturities.

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's condensed consolidated balance sheets at September 30, 2017March 31, 2020 and December 31, 2016 are2019 is as follows:

  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
                
September 30, 2017               
Assets:   Limited partnerships $69,568  $-  $-  $69,568  $69,568 
Liabilities:   Short-term borrowings  20,000   -   20,000   -   20,000 
                     
December 31, 2016                    
Assets:   Limited partnerships  76,469   -   -   76,469   76,469 
Liabilities:   Short-term borrowings  20,000   -   20,000   -   20,000 
  Carrying  Fair Value 
  Value  Level 1  Level 2  Level 3  Total 
March 31, 2020               
Assets:                 
Limited partnerships 
$
7,981
  
$
–
  
$
–
  
$
7,981
  
$
7,981
 
Commercial mortgage loans  
11,882
   
–
   
–
   
12,492
   
12,492
 
Liabilities:                      
Short-term borrowings  
20,000
   
–
   
20,000
   
–
   
20,000
 
                     
December 31, 2019                    
Assets:                      
Limited partnerships 
$
23,292
  
$
–
  
$
–
  
$
23,292
  
$
23,292
 
Commercial mortgage loans  
11,782
   
–
   
–
   
12,068
   
12,068
 
Liabilities:                      
Short-term borrowings  
20,000
   
–
   
20,000
   
–
   
20,000
 


(9)  Stock BasedStock-Based Compensation:

The Company grantsissues shares of restricted Class B restricted stockCommon Stock to the Company's outside directors in lieuas part of cash, as their annual retainer compensation (the "annual retainer shares").  These annual retainercompensation.  The shares are distributed to the outside directors on the vesting date, which, with the exception of pro-rated annual retainers granted to outside directors, is one year following the date of grant.  On August 31, 2017,May 17, 2019, the Company granted shares of restricted Class B restricted stock toCommon Stock in connection with the election of a new outside director, in lieu of cash, asreflecting such director'sdirector’s pro-rated annual retainer compensation, which shares will vest and be distributed on May 9, 2018.7, 2020.  Additionally, effective May 22, 2019, John D. Nichols, Jr. ceased serving as the Company's Interim Chief Executive Officer and principal executive officer, but continued to serve as Chairman of the Company's Board of Directors.  On May 22, 2019, the Company granted shares of restricted Class B Common Stock to Mr. Nichols in connection with this transition, reflecting his pro-rated annual retainer compensation, which shares will also vest and be distributed on May 7, 2020.  The table below provides detail of the restricted stock issuances to directors for 20162019 and 2017:2020:

          Value 
          Per Share 
 Effective Number of Shares  Vesting Service on Grant 
 Date Issued  Date Period Date 
         
5/10/2016  17,677��5/10/20177/1/2016 - 6/30/2017 $24.89 
           
5/9/2017  18,183 5/9/20187/1/2017 - 6/30/2018 $24.20 
           
8/31/2017  1,257 5/9/20188/31/2017 - 6/30/2018 $21.90 


- 20 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Grant Date 
Number of
Shares Issued
 Vesting DateService Period 
Grant Date Fair
Value Per Share
 
5/8/2018  19,085 5/8/20197/1/2018 - 6/30/2019 
$
23.05 
           
5/7/2019  29,536 5/7/20207/1/2019 - 6/30/2020 
$
16.25 
           
5/17/2019  3,591 5/7/20207/1/2019 - 6/30/2020 
$
16.25 
           
5/22/2019  3,541 5/7/20207/1/2019 - 6/30/2020 
$
16.25 

Compensation expense related to the above stock grants is recognized over the period in which the directors render services.
On February 8, 2017, the Company awarded 20,181 shares of Class B restricted stock to certain of the Company's executives under the Company's Restricted Stock Compensation Plan.   The restricted shares were granted to certain executives under the terms of the Company's Executive Incentive Bonus Plan.  The restricted shares will vest over a three-year period from the date of grant and will be distributed solely in the Company's Class B common stock.  The restricted shares were valued based on the closing price of the Company's Class B common stock on the day the award was granted.  Each share was valued at $23.80 per share, representing a total value of $480.  Non-vested restricted shares will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee of the Company's Board of Directors.

- 16 -
In May 2017,March 2018, the Company's Compensation Committee granted equity-based awards. Underawards pursuant to the Long-Term Incentive Plan.  Certain participants under the Long-Term Incentive Plan ("LTIP"were granted equity awards (the "2018 LTIP Awards"), with the final bonus amount will benumber of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a measurement of the combined results of the Company's 20172018 growth in netgross premiums earned and the 2017Company's 2018 combined ratio.  The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned.  All  No 2018 LTIP awards forAwards were earned based on the Company's named executive officers ("NEOs") will be paidperformance in restricted2018, and therefore no shares ofwere issued pursuant to the 2018 LTIP Awards.  In addition to the 2018 LTIP Awards, in March 2018 the Company's Class B common stock at the end of the 2017 annual performance period and will vest after a one year period.  All LTIP awards for non-NEOs will be paid in restricted shares of the Company's Class B common stock at the end of the 2017 annual performance period and will vest over a three year period. TheCompensation Committee also granted Value Creation Incentive Plan ("VCIP"awards (the "2018 VCIP Awards") is an equity-based award for NEO'sto certain participants under the Long-Term Incentive Plan.  The 2018 VCIP Awards are performance-based equity awards that will be earned based on athe Company's cumulative increase in operating income, as defined above, over a three-year performance period.  Each target VCIP share opportunity will be determined by a measurement of the Corporation's cumulative operating incomeperiod from January 1, 20172018 through December 31, 20192020 relative to ana cumulative operating income goal for the period set by the Compensation Committee in March 2017.  For the purpose of2018.  Any 2018 VCIP calculation, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments.  All VCIP awardsAwards that are earned will be paid in unrestricted shares of the Company's Class B common stockCommon Stock at the end of the three-year performance period, but no later than March 15, 2020.2021.  No shares have beenare eligible to be issued under the 2018 VCIP Awards as of September 30, 2017March 31, 2020.

On November 13, 2018, the Company entered into an employment agreement with its Interim Chief Executive Officer, John D. Nichols, Jr.  Pursuant to the terms of this employment agreement, on November 13, 2018, Mr. Nichols was granted 85,000 restricted shares of the Company's Class B Common Stock (the "Nichols Stock Grant"), of which 42,500 shares vested as of October 17, 2019; 21,250 shares will vest as of October 17, 2020, and 21,250 shares will vest as of October 17, 2021.  The Company incurred $14 of expense during the three months ended March 31, 2020 related to the Nichols Stock Grant.

In March 2019, the Company's Compensation Committee granted equity-based awards pursuant to the Long-Term Incentive Plan.  Certain participants under these plans.the Long-Term Incentive Plan were granted equity awards (the "2019 LTIP Awards"), with the number of shares of Class B Common Stock earned pursuant to such awards determined by applying a performance matrix consisting of a corporate performance component as well as a personal performance component.  The corporate performance component of the 2019 LTIP Awards was determined based on the Company's achievement of 2019 underwriting income compared to the plan target.  The Company's underwriting income was calculated as income (loss) before federal income tax expense (benefit), less net realized and unrealized gains (losses) on investments, less net investment income.  The personal performance component of the 2019 LTIP Awards was determined based on the achievement of personal goals that align with departmental and corporate objectives for 2019.  2019 LTIP Awards earned were paid in shares of restricted Class B Common Stock in early 2020.  One-third of such shares will vest annually over the three-year period beginning one year from the date of issue.  The Company incurred $35 of expense during the three months ended March 31, 2020 related to the 2019 LTIP Awards.

On May 22, 2019, the Company entered into an employment agreement with its new Chief Executive Officer, Jeremy D. Edgecliffe-Johnson.  Pursuant to the terms of this employment agreement, on May 22, 2019, Mr. Edgecliffe-Johnson was granted 70,000 restricted shares of the Company's Class B Common Stock (the "Edgecliffe-Johnson Stock Grant"), of which 35,000 shares will vest as of June 1, 2022, 21,000 shares will vest as of June 1, 2023, and 14,000 shares will vest as of June 1, 2024.  The Company incurred $39 of expense during the three months ended March 31, 2020 related to the Edgecliffe-Johnson Stock Grant.

On November 5, 2019, the Board of the Company, upon the recommendation of the Compensation Committee, approved equity compensation awards to be granted to seven members of senior management as of November 12, 2019 under the Company’s Long-Term Incentive Plan.  The Board approved a total of $1,100 in grants of restricted shares of the Company’s Class B Common Stock, which will vest on January 1, 2023, subject to the recipient’s continued employment with the Company through the vesting date. The Company incurred $88 of expense during the three months ended March 31, 2020 related to this grant.


(10)  Litigation, Commitments and Contingencies:

In the ordinary, regular and routine course of their business, the Company and its insurance subsidiariesInsurance Subsidiaries are frequently involved in various matters of litigation relating principally to claims for insurance coverage provided.  No currently pending matter is deemed by management to be material to the Company.Company, other than as noted below.

Personnel Staffing Group Litigation

In July 2019, Protective Insurance Company (“Protective”) was named as a defendant in an action brought by a former insured, Personnel Staffing Group d/b/a MVP Staffing (“PSG”), in the U.S. District Court for the Central District of California (the “California Action”) alleging that Protective had breached its workers’ compensation insurance policy and had breached the duties of good faith and fair dealing. Protective provided workers’ compensation insurance to PSG from January 1, 2017 through June 30, 2018, which was subject to a $500 per claim deductible to be paid by PSG.  No specific damages were included in the complaint.  In August 2019, Protective filed a motion to dismiss or stay the action.

- 2117 -
 
NotesIn August 2019, Protective filed a lawsuit against PSG in Marion County Superior Court, in Indianapolis, Indiana (the “Indiana Court”) alleging breach of contract, breach of the parties' collateral agreement, breach of the parties' indemnity agreement, and seeking a declaratory judgment regarding PSG’s obligation to Unaudited Condensed Consolidated Financial Statements (continued)fund its ongoing claim deductible obligations and adequately collateralize Protective’s current and ongoing claims exposure pursuant to terms of the parties' agreements (the “Indiana Action”).  In October 2019, Protective amended the complaint to include allegations of misrepresentation as to source of coverage, negligent misrepresentation, fraud and racketeering and seeking injunctive relief.  In November 2019, PSG filed a motion to dismiss the Indiana Action on the basis of comity with the California Action, claiming that California was the proper forum for Protective’s claims.

In February 2020, the Indiana Court issued an order dismissing the Indiana Action without prejudice; the Indiana Court declined to rule on the legal effect of the forum selection clause in the parties’ agreements, finding that any interpretation should be addressed by the court in the California Action.   On April 28, 2020, Protective’s motion to dismiss the California Action was granted without prejudice on grounds that Indiana is the more appropriate forum.  On May 4, 2020, PSG filed a notice of appeal of the order of dismissal in the California Action.  On May 1, 2020, Protective filed a motion with the Indiana Court to re-open the Indiana Action.  Protective intends to vigorously pursue its claims against PSG, however, the ultimate outcome cannot be presently determined.

Pursuant to the terms of the workers’ compensation policies, Protective has a duty to adjust and pay claims arising under the policies regardless of whether PSG makes payments to Protective for deductible obligations under the policies.  Under its contractual obligations to Protective, PSG is required to maintain a “loss fund” for the payment of claims, the balance of which is to remain at or above $4,000; in addition, PSG is required to provide collateral in an amount equal to 110% of Protective’s current open case reserves on workers’ compensation claims arising under the policies.
As of March 31, 2020, Protective had approximately $14,680 in deductible receivables on claims arising under PSG’s workers’ compensation policies and had exhausted all collateral provided by PSG.  Protective continues to pay claims settlements under the policies without reimbursement from PSG.  For the past six months, the average monthly deductible invoices have been approximately $1,300.  PSG’s estimated ultimate obligation under the agreements is approximately $44,600 as of March 31, 2020 (inclusive of the $14,680 in deductible receivables noted above).  At March 31, 2020, based on the Company's assessment that PSG will continue to operate as a business and that the terms of the agreement with PSG will be legally enforceable, the Company believes that it will fully collect all current and future amounts due from PSG relating to this matter.
The Company included this matter in its assessment of the impact of adopting ASU 2016-13, the new guidance for measuring CECL, which is discussed in Note 1.  A probability-of-default methodology was applied to projected estimated cash flows to estimate the allowance for expected credit losses for this matter.  The Company considered the delay in reimbursement for claims paid as well as probability of default assumptions when analyzing the credit loss related to this matter. As of January 1, 2020, in conjunction with the adoption of ASU 2016-13, the Company recorded an allowance for expected credit losses of $15,000 ($11,850, net of tax). There was no change to the allowance during the first quarter of 2020, as the ultimate obligation and projected cash flows had not materially changed since January 1, 2020 when the initial measurement of the credit risk was conducted.


(11)  Shareholders' Equity:
Changes in
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B Common Stock.  On August 6, 2019, the Company's Board of Directors reaffirmed its share repurchase program, but also provided that the aggregate dollar amount of shares of the Company's common stock outstandingthat may be repurchased under the share repurchase program between August 6, 2019 and additional paid-in-capital are as follows:August 6, 2020 may not exceed $25,000, including a limit of up to $6,250 per quarter.  No duration has been placed on the Company's share repurchase program, and the Company reserves the right to amend, suspend or discontinue it at any time.  The share repurchase program does not commit the Company to repurchase any shares of its common stock.


                Additional 
    Class A    Class B  Paid-in 
  Shares   Amount  Shares   Amount  Capital 
Balance at December 31, 2016  2,623,109   $112   12,460,900   $532  $54,286 
   Restricted stock grants  -    -   37,858    2   919 
   Repurchase of common shares  -    -   (84,960)   (4)  (360)
Balance at September 30, 2017  2,623,109   $112   12,413,798   $530  $54,845 
During the third quarter of 2017,three months ended March 31, 2020, the Company paid $1,880$1,782 to repurchase 84,960126,764 shares of Class B common stockCommon Stock under athe share repurchase program approved by its Board of Directors on August 31, 2017.

The components of equity for the nine months ended September 30, 2017 were as follows:


  Total equity 
Balance at December 31, 2016 $404,345 
Net income  1,847 
Other comprehensive income  11,947 
Cash dividends paid to shareholders  (12,250)
Restricted stock grants  921 
Repurchase of common shares  (1,880)
Balance at September 30, 2017 $404,930 


The components of equity for the nine months ended September 30, 2016 were as follows:


  Total equity 
Balance at December 31, 2015 $394,498 
Net income  24,082 
Other comprehensive loss  (1,116)
Cash dividends paid to shareholders  (11,885)
Restricted stock grants  1,343 
Balance at September 30, 2016 $406,922 


program.

- 2218 -
The following table illustrates changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2020:
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
  
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total 
Beginning balance at December 31, 2019 
$
(494
)
 
$
9,863
  
$
9,369
 
             
Other comprehensive income (loss) before reclassifications
  
(687
)
  
(20,256
)
  
(20,943
)
Amounts reclassified from accumulated other comprehensive income (loss)
  
–
   
(605
)
  
(605
)
             
Net current-period other comprehensive income (loss)  
(687
)
  
(20,861
)
  
(21,548
)
             
Ending balance at March 31, 2020 
$
(1,181
)
 
$
(10,998
)
 
$
(12,179
)

The following table illustrates changes in accumulated other comprehensive income (loss) by component for the ninethree months ended September 30, 2017:March 31, 2019:

     Unrealized    
     holding gains on    
  Foreign  available-for-sale    
  Currency  securities  Total 
          
Beginning balance $(831) $34,051  $33,220 
             
   Other comprehensive income            
      before reclassifications  510   15,999   16,509 
             
   Amounts reclassified from            
      accumulated other            
      comprehensive income  -   (4,562)  (4,562)
             
Net current-period other            
   comprehensive income  510   11,437   11,947 
             
Ending balance $(321) $45,488  $45,167 
  
Foreign
Currency
  
Unrealized Holding Gains (Losses) on
Available-for-sale Securities
  Total 
Beginning balance at December 31, 2018 
$
(1,139
)
 
$
(6,208
)
 
$
(7,347
)
             
Other comprehensive loss before reclassifications
  
307
   
7,671
   
7,978
 
Amounts reclassified from accumulated other comprehensive income (loss)
  
–
   
785
   
785
 
             
Net current-period other comprehensive income (loss)  
307
   
8,456
   
8,763
 
             
Ending balance at March 31, 2019 
$
(832
)
 
$
2,248
  
$
1,416
 


(12)  Related Parties:

The following table illustrates changes in accumulated other comprehensive income by component forCompany utilizes the nine months ended September 30, 2016:

     Unrealized    
     holding gains on    
  Foreign  available-for-sale    
  Currency  securities  Total 
          
Beginning balance $(1,066) $38,924  $37,858 
             
   Other comprehensive income            
      before reclassifications  398   7,471   7,869 
             
   Amounts reclassified from            
      accumulated other            
      comprehensive income  -   (8,985)  (8,985)
             
Net current-period other            
   comprehensive income  398   (1,514)  (1,116)
             
Ending balance $(668) $37,410  $36,742 

(12) Other Operating Expenses:
During 2015, the Company entered into a consulting contract withservices of an insurance brokerageinvestment firm of which aone director of the Company is CEOa partial owner.  This investment firm manages equity securities and a Managing Director.  The consulting contract provides forfixed income portfolios held by the Company with an annual feeaggregate market value of $300 for 2017approximately $6,698 at March 31, 2020.  Total commissions and 2016, respectively.  The Company also has a brokerage agreement withnet fees earned by this entity.  The Company incurred commission expense in connection with insurance policies written in 2017investment firm and 2016 under this brokerage agreement.  Total commission expenseits affiliates on these portfolios were $37 and $34 for the three months ended September 30, 2017March 31, 2020 and 2016 was $164 and $140, respectively.  Total commission expense for the nine months ended September 30, 2017 and 2016 was $523 and $280, respectively.2019.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(13)  Subsequent Events:

On May 5, 2020, the Company's Board of Directors declared a regular quarterly dividend of $0.10 per share on the Company's Class A and Class B Common Stock.  The Company has evaluated subsequent events for recognition or disclosure in these condensed consolidated financial statements fileddividend per share will be payable June 2, 2020 to shareholders of record on Form 10-Q with the Securities and Exchange Commission, and no events have occurred through the filing date of this Form 10-Q which require recognition or disclosure.

May 19, 2020.

- 2419 -

ITEM 22. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The Company specializesProtective Insurance Corporation is a property-casualty insurer specializing in marketing and underwriting insuranceproperty, liability and workers' compensation coverage for thetrucking and public transportation industry.  The Company operatesfleets, as well as coverage for trucking industry independent contractors.  We operate as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

The term “Protective,” as used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), refers to Protective Insurance Corporation, the parent company.  The terms the “Company,” “we,” “us” and “our,” as used throughout this MD&A, refer to Protective and all of its subsidiaries, unless the context clearly indicates otherwise.  The term “Insurance Subsidiaries,” as used throughout this MD&A, refers to Protective Insurance Company, determined that its business constituted one reportable propertyProtective Specialty Insurance Company, Sagamore Insurance Company and casualty insurance segmentB&L Insurance, Ltd.

Expected Credit Losses Standard (CECL) Adoption

On January 1, 2020, we adopted the provisions of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13.  ASU 2016-13 introduced a current expected credit loss ("CECL") model for measuring expected credit losses for certain types of financial instruments held at the reporting date requiring significant judgment in application based on historical experience, current conditions and reasonable supportable forecasts, but is not prescriptive about certain aspects of estimating expected losses. We adopted the guidance using a modified retrospective approach as of January 1, 2017.  During 20162020 and recognized a cumulative effect adjustment of $15.5 million ($12.3 million net of tax), to the opening balance of retained earnings.  The adjustment was primarily related to estimating credit losses on our accounts receivable balances, reinsurance recoverable balances and commercial mortgage loans at the date of adoption. We did not record any significant additional impact to the statement of operations in the first quarter of 2020.

The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment ("OTTI") model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.  We adopted the guidance related to available-for-sale fixed income securities on January 1, 2020 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior years,to the effective date.  The effect of the prospective transition approach was to maintain the same amortized cost basis before and after the effective date.  As of March 31, 2020, we intended to sell one security in an unrealized loss position and, in accordance with the new guidance, recorded a write down to earnings of less than $0.1 million.  We reviewed our remaining fixed income securities in an unrealized loss position as of March 31, 2020 and determined that the losses were primarily the result of non-credit factors, such as the increase in market volatility due to the recent disruption in global financial markets as a result of the novel coronavirus COVID-19 ("COVID-19") pandemic and responses to it. We currently do not intend to sell nor do we expect to be required to sell these securities before recovery of their amortized cost. Based on the above factors, we did not record any allowance for credit losses under the new guidance related to our available-for-sale securities under the new guidance in the first quarter of 2020.

COVID-19 Impacts

Beginning in March 2020, the global pandemic associated with COVID-19 and related economic conditions began to impact the global economy and our results of operations. While we did not see a material impact on our underwriting income (loss), as defined below, during the three months ended March 31, 2020, we did incur net realized and unrealized losses on investments of $27.8 million during the period, primarily driven by the impact of changes in fair value on our equity investments as a result of the recent disruption in global financial markets.  Additionally, insurance departments throughout the country have issued bulletins and regulations urging or requiring insurers to extend grace periods for the payment of policy premiums and to refrain from canceling or non-renewing policies for the non-payment of policy premiums for policyholders adversely affected by COVID-19; however, we have not seen a material decrease or slowdown in premium collection to date.  We have also taken additional steps including a temporary freeze on hiring and share repurchases and reductions to discretionary spending in response to COVID-19.  For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, had two reportable segments – property and casualty insurance and reinsurance.  The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.  The prior period segment information throughoutsee "Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q was updated to conform to the current year presentation.10-Q.


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Liquidity and Capital Resources

The primary sources of the Company'sour liquidity are (1) funds generated from insurance operations, including net investment income, (2) proceeds from the sale of investments, and (3) proceeds from maturing investments.

The CompanyWe generally experiencesexperience positive cash flow from operations.  Premiums are collected on insurance policies in advance of the disbursement of funds infor payment of claims.  Operating costs of the Company'sour property/casualty insurance subsidiaries,Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than one-third of net premiums earned on a consolidated basis, and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues.  The Company'sOur cash flow relating to premiums is significantly affected by reinsurance programs in effect, from time-to-time, whereby the Company cedeswe cede both premium and risk to other insurance and reinsurance companies.  These programs vary significantly among products, and certain contracts call for reinsurance payment patterns, which do not coincide with the collection of premiums by the Companyus from itsour insureds.

On August 31, 2017, the Company'sour Board of Directors authorized the reinstatement of itsour share repurchase program for up to 2,464,209 shares of the Company'sour Class A or Class B Common Stock.  On August 6, 2019, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock.stock that may be repurchased under the share repurchase program between August 6, 2019 and August 6, 2020 may not exceed $25.0 million and added a limit of no more than $6.25 million in repurchases per quarter.  The repurchases may be made in the open market or through privately negotiated transactions, from time-to-time, and in accordance with applicable laws, rules and regulations.  The share repurchase program expiringmay be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash on March 5, 2018, authorizes the repurchase of up to $17.5 millionhand. The actual number and value of the Company's outstanding common shares at various pricing thresholds.  Because repurchasesto be purchased will be subject todepend on the performance of our stock price, market volume and timing constraints, there is no assurance asother market conditions.  During the three months ended March 31, 2020, we paid $1.8 million to repurchase 126,764 shares of Class B Common Stock under the exact number of shares that will be repurchased, if any. 

- 25 -

For the first nine months of 2017, the Company produced positive cash flow from operations totaling $55.2 million, which compared to positive cash flow from operations of $32.4 million generated during the first nine months of 2016.  The increase in cash flow from the 2016 period was mainly due to higher premium volume during the first nine months of 2017.share repurchase program.

For several years, the Company'sour investment philosophy has emphasized the purchase of short-term bonds with superiorhigh quality and liquidity.  As flat yield curves have not provided incentiveOur fixed income investment portfolio continues to lengthen maturitiesemphasize shorter-duration instruments.  If there was a hypothetical increase in recent years,interest rates of 100 basis points, the Company has continuedprice of our fixed income portfolio, including cash, at March 31, 2020 would be expected to maintain itsfall by approximately 2.5%.  The credit quality of our fixed maturity portfolio at short-term levels.income securities remains high with a weighted average rating of AA-, including cash.  The average contractual life of the Company'sour fixed maturityincome and short-term investment portfolio increased slightly to 4.8 years during the first nine months of 2017 from 4.5was 6.9 years at both March 31, 2020 and December 31, 2016.2019.  The average duration of the Company'sour fixed maturityincome portfolio remains much shorter than both the contractual maturity average and the duration of the Company'sour liabilities.  The CompanyWe also remainsremain an active participant in the equity securities market, using capital which is in excess of amounts considered necessary to fund our current operations.  The long-term horizon for the Company'sour equity investments allows itus to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus.  Investments made by the Company'sour domestic property/casualty insurance subsidiariesInsurance Subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners (the "NAIC"), which are designed to provide protection for both policyholders and shareholders.
The net
Net cash used in investingoperating activities totaled $36.1was $1.3 million during the three months ended March 31, 2020 compared to net cash flows from operations of $11.4 million for the first ninethree months ended March 31, 2019.  The decrease in operating cash flows was primarily related to lower premium volume as well as the timing of 2017.  Thispayments required under our reinsurance treaties, partially offset by higher investment income from our fixed income securities during the three months ended March 31, 2020 compared to netthe same period in 2019.

Net cash provided by investing activities was $16.5 million for the three months ended March 31, 2020 compared to cash used in investing activities of $27.1$47.3 million for the three months ended March 31, 2019.  The $63.8 million change was primarily due to a decrease in the investment of cash and cash equivalent investments into fixed income securities and an increase in net proceeds from maturities and sales of fixed income and equity securities, partially offset by $2.6 million less in limited partnership distributions, during the 2016 period.  The increasethree months ended March 31, 2020 when compared to the same period in 2019.

Net cash used in investing activities was the result of the normal timing of purchases and sales and maturities in our investment portfolio, partially offset by increased distributions from limited partnership investments.

Financingfinancing activities for the first ninethree months of 2017ended March 31, 2020 consisted of the regular cash dividend payments to shareholders of $12.3$1.4 million ($.810.10 per share) combined with theand $1.8 million to repurchase of 84,960 shares of the Company'sour Class B common stock during the third quarter of 2017 for $1.9 million.Common Stock.  Financing activities for the first ninethree months of 2016ended March 31, 2019 consisted solely of the regular cash dividend payments to shareholders of $11.9$1.5 million ($.780.10 per share). and $0.5 million to repurchase shares of our Class A and B Common Stock.

The Company maintains a revolving line of credit with a $40.0 million limit and an expiration date of September 23, 2018.  Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company's option.  Outstanding drawings on this line of credit were $20.0 million as of both September 30, 2017 and December 31, 2016.  At September 30, 2017, the effective interest rate was 2.34%.  The Company had $20.0 million remaining under the line of credit at September 30, 2017.  The Company's revolving line of credit has three financial covenants, all of which were met as of September 30, 2017.  The three financial covenants relate to a minimum Generally Accepted Accounting Principles ("GAAP") net worth, a minimum statutory surplus and a minimum A.M. Best rating.
The Company'sOur assets at September 30, 2017March 31, 2020 included $65.2$69.5 million of investments classified as short-termincluded within cash and cash equivalents on the condensed consolidated balance sheet that wereare readily convertible to cash without significant market penalty.  Anpenalty and an additional $48.8$97.5 million of fixed maturityincome investments will mature within the twelve-month period following September 30, 2017.  The Company believes thatmaturing in less than one year.  We believe these liquid investments, plus the expected cash flow from premium collections, are more than sufficient to provide for projected claim payments and operating cost demands.  In the event competitive conditions produce inadequate premium rates and the Company chooseswe choose to further restrict volume or our premiums are further restricted due to market conditions including related to the impact of COVID-19, the liquidity of itsour investment portfolio would permit managementus to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time.  In addition, our reinsurance program is structured to avoid significant cash outlays that accompany large losses.

- 2621 -
We maintain a revolving credit facility with a $40.0 million limit, with the option for up to an additional $35.0 million in incremental loans at the discretion of the lenders, which has an expiration date of August 9, 2022.  Interest on this revolving credit facility is referenced to the London Interbank Offered Rate and can be fixed for periods of up to one year at our option.  Outstanding drawings on this revolving credit facility were $20.0 million as of March 31, 2020.  At March 31, 2020, the effective interest rate was 2.03% and we had $20.0 million remaining under the revolving credit facility.  The current outstanding borrowings were used to repay our previous line of credit.  Our revolving credit facility has two financial covenants, each of which were met as of March 31, 2020.  These covenants require us to have a minimum U.S. generally accepted accounting principles ("GAAP") net worth and a maximum consolidated debt to equity ratio of 0.35.

Annualized net premiums written by our Insurance Subsidiaries for the first quarter of 2020 equaled approximately 130% of the combined statutory surplus of these subsidiaries. According to the NAIC, acceptable ranges for the ratio of net premiums written to statutory surplus include results of up to 300%.  This ratio is designed to measure our ability to absorb above-average losses and our financial strength. Additionally, the statutory capital of each of our Insurance Subsidiaries substantially exceeded minimum risk-based capital requirements set by the NAIC as of March 31, 2020.  As a result, we have the ability to increase our business without seeking additional capital to meet regulatory guidelines.

Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of the insurance subsidiaries.our Insurance Subsidiaries.  As such, there are statutory restrictions on the transfer of substantial portions of this equity to the parent company.Protective.  At September 30, 2017, $54.3March 31, 2020, $61.9 million may be transferred by dividend or loan to the parent companyProtective during the remainder of 20172020 without approval by, or prior notification to, regulatory authorities.  An additional $258.1$140.4 million of shareholders' equity of the Company's insurance subsidiariesour Insurance Subsidiaries could be advanced or loaned to the parent companyProtective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical.  The Company believes thatWe believe these restrictions pose no material liquidity concerns to the Company.  The Companyfor us.  We also believes thatbelieve the financial strength and stability of the Company's insurance subsidiariesour Insurance Subsidiaries would permit access by the parent companyProtective to short-term and long-term sources of credit when needed.  The parent companyProtective had cash and marketable securities valued at $11.1$14.7 million at September 30, 2017.March 31, 2020.

Net
- 22 -

Non-GAAP Measures

We believe investors’ understanding of our performance is enhanced by our disclosure of underwriting income (loss), which is a measure that is not calculated in accordance with GAAP. Underwriting income (loss) represents the pre-tax profitability of our insurance operations and is derived by subtracting net realized and unrealized gains (losses) on investments and net investment income from income (loss) before federal income tax expense (benefit). We use underwriting income (loss) as an internal performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of operations, our underlying business performance and our ongoing operating trends. Underwriting income (loss) should not be viewed as a substitute for income (loss) before federal income tax expense (benefit) calculated in accordance with GAAP, and other companies may define underwriting income (loss) differently.

The ratio of consolidated other operating expenses, less commissions and other income, to net premiums writtenearned, or our expense ratio, and the ratio of losses and loss expenses incurred, plus other operating expenses, less commissions and other income, to net premiums earned, or our combined ratio, are measures of our profitability that we believe increase the period-to-period comparability of our operational results.  Our management uses these ratios to evaluate performance, allocate resources and forecast future operating periods.  While expense ratios and combined ratios are widely used within our industry, our use of such ratios may not be directly comparable to similarly titled measures reported by the Company's insurance subsidiaries for the first nine months of 2017 equaled approximately 82% of the combined statutory surplus of these subsidiaries, a level consistent with the increase in premiums written during 2017.  Premium writings of up to 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities.  Further, the statutory capital of each of the Company's insurance subsidiaries substantially exceeded minimum risk based capital requirements set by the National Association of Insurance Commissioners as of September 30, 2017.  Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.other companies.

  Three Months Ended 
  March 31 
 (dollars in thousands)
 2020  2019 
Income (loss) before federal income tax expense (benefit)
 $(25,139) 
$
3,514
 
Less: Net realized and unrealized gains (losses) on investments  (27,756)  
6,028
 
Less: Net investment income  7,236   
6,232
 
Underwriting loss $(4,619) 
$
(8,746
)
         
         
Ratios        
Losses and loss expenses incurred $81,831  
$
87,122
 
Net premiums earned  109,659   
110,013
 
Loss ratio  74.6%  
79.2
%
         
Other operating expenses $34,110  
$
33,701
 
Less: Commissions and other income  1,663   
2,064
 
Other operating expenses, less commissions and other income  32,447   
31,637
 
Net premiums earned  109,659   
110,013
 
Expense ratio  29.6%  
28.8
%
         
Combined ratio  104.2%  
108.0
%

- 23 -

Results of Operations

Comparison of ThirdFirst Quarter 20172020 to ThirdFirst Quarter 20162019 (in thousands)

The following table provides information regarding premiums written and earned for the quarters ended September 30 (dollars in thousands):


  2017  2016  Change 
          
Gross Premiums Written $131,523  $101,921  $29,602 
Net Premiums Written  96,222   70,530   25,692 
Net Premiums Earned  89,100   71,235   17,865 
  2020  2019  Change  % Change 
Gross premiums written $134,006  
$
148,893
  
$
(14,887
)
  
(10.0
)%
Ceded premiums written  (24,772)  
(33,571
)
  
8,799
   
(26.2
)%
Net premiums written $109,234  
$
115,322
  
$
(6,088
)
  
(5.3
)%
                 
Net premiums earned $109,659  
$
110,013
  
$
(354
)
  
(0.3
)%
Net investment income  7,236   
6,232
   
1,004
   
16.1
%
Commissions and other income  1,663   
2,064
   
(401
)
  
(19.4
)%
Net realized and unrealized gains (losses) on investments  (27,756)  
6,028
   
(33,784
)
  
(560.5
)%
Total revenue  90,802   
124,337
         
Losses and loss expenses incurred  81,831   
87,122
   
(5,291
)
  
(6.1
)%
Other operating expenses  34,110   
33,701
   
409
   
1.2
%
Total expenses  115,941   
120,823
         
Income (loss) before federal income tax expense (benefit)  (25,139)  
3,514
   
(28,653
)
    
Federal income tax expense (benefit)  (2,983)  
766
   
(3,749
)
    
Net income (loss) $(22,156) 
$
2,748
  
$
(24,904
)
    
                 

Gross premiums written during the thirdfirst quarter of 2017 increased $29.62020 decreased $14.9 million (29.0%(10.0%), while net premiums earned increased $17.9decreased $0.4 million (25.1%(0.3%), as compared to the same period in 2016.first quarter of 2019.  The higher gross premiums written andlower net premiums earned in the first quarter of 2020 were dueprimarily the result of declines in premiums associated with lower retention rates as we continue to take actions to improve profitability, including rate increases in salesand non-renewal of both commercial automobilecertain risks, partially offset by rate increases and workers' compensation products and were consistent with the Company's growth strategy.  new business policies sold.  The difference in the percentage change for premiums written compared to earned iswas reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
- 27 -

Premiums ceded to reinsurers on the Company'sour insurance business averaged 26.8%18.5% of gross premiums written for the thirdfirst quarter of 20172020 compared to 30.8%22.5% in the 2016 third quarter.first quarter of 2019.  The decrease in premiums ceded was primarily due to a mix shift toward more commercial automobile business (specifically Independent Contractor lines that carry no reinsurance coverage) and less workers' compensation business.

Losses and loss expenses incurred during the first quarter of 2020 decreased $5.3 million (6.1%) compared to the first quarter of 2019, resulting in a loss ratio of 74.6% during the first quarter of 2020 compared to a loss ratio of 79.2% during the first quarter of 2019.  The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums ceded to reinsurance decreased as a result of changesearned.  The lower losses and loss expenses and lower loss ratio in the Company's reinsurance structure.first quarter of 2020 reflected results of our underwriting actions, including non-renewal of unprofitable business as well as significant rate increases in commercial automobile.

Net investment income duringfor the thirdfirst quarter of 2017 was 14.6% higher than2020 increased 16.1% to $7.2 million compared to $6.2 million for the thirdfirst quarter of 2016, due primarily to higher interest rates leading to higher reinvestment yields for short-duration fixed income securities, increased dividends and a 3.0%2019. The increase reflected an increase in average funds invested resulting from positive cash flow.  After-tax investment income increased by 13.6%compared to $2.9 million during the thirdfirst quarter of 2017, compared to $2.5 million during2019, as well as the 2016 third quarter, reflecting the aforementioned higher interest rates and reinvestment yield environment.  

The third quarter 2017 net realized investment gains of $5.9 million resulted primarilycontinued reallocation from $3.4 million in gains from trading activities and $2.5 million in gains from the Company's investments in limited partnerships.  Comparative third quarter 2016 net realized investment gains were $7.7 million, consisting primarily of $4.4 million in gains reported from the Company'sequity investments in limited partnerships and $3.3cash and cash equivalent investments into short-duration, high-quality bonds.  

Net realized and unrealized losses on investments of $27.8 million during the first quarter of 2020 were primarily driven by $22.3 million in unrealized losses on equity securities, which were largely attributable to disruptions in the financial markets related to COVID-19, $4.8 million in net realized losses on sales of securities, excluding impairment losses, and a $0.7 million decrease in the value of our limited partnership investments.  Comparative first quarter 2019 net realized and unrealized gains from trading activities.on investments of $6.0 million were primarily driven by $6.0 million in unrealized gains on equity securities and a $0.4 million increase in the value of our limited partnership investments, partially offset by impairments on our fixed income securities of $0.3 million recognized during the period.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in the aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Losses and loss expenses incurred during the third quarter of 2017 increased $3.8 million (6.8%) compared to the 2016 third quarter, resulting in a loss ratio of 68.1%, compared to a loss ratio of 79.8% during the third quarter of 2016.  The year-over-year decrease in the loss ratio reflects a $10.1 million reserve strengthening that occurred during the third quarter of 2016.

Other operating expenses for the thirdfirst quarter of 20172020 increased $8.0$0.4 million, or 37.5%1.2%, fromto $34.1 million compared to the thirdfirst quarter of 2016.  2019.  The increase in other operating expenses was driven primarily due to increasedby higher commission expenses as a result of increased premiums written.the mix of premium written during the first quarter of 2020 partially offset by lower salary and benefit expenses during the period.  The expense ratio was 29.6% during the first quarter of 2020 compared to 28.8% for the first quarter of 2019.  The increase in the expense ratio of consolidated other operatingwas primarily related to the higher commission expenses less commissions and other income tonoted above as well as the decrease in net premiums earned was 31.2% during the third quarter of 2017 compared to 28.1% for the 2016 third quarter.period.

- 24 -
Federal income tax benefit was $3.0 million for the first quarter of 2020 compared to federal income tax expense of $0.8 million for the first quarter of 2019.  The effective federal tax rate on consolidated income for the thirdfirst quarter of 20172020 was 30.0%an 11.9% tax benefit compared to 29.0%a 21.8% tax expense in the first quarter of 2019.  The pre-tax loss for the 2016 third quarter.three months ended March 31, 2020 makes these interim period effective tax rates less comparable year over year.  The difference in the effective federal income tax rate differs from the normal statutory rate was primarily asrelated to the recording of a resultvaluation allowance in the current period on our deferred tax assets, in addition to the effects of tax-exempt investment income.income and the dividends received deduction.  In assessing the valuation of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or availability to carryback the losses to taxable income during the period in which those temporary differences become deductible.  We considered several factors when analyzing the need for a valuation allowance including our current three year cumulative loss through March 31, 2020, the increase in deferred tax assets due to the adoption of CECL at January 1, 2020 discussed above, the change in unrealized gains and losses and the loss of a high taxable income year from the carryback period.  The three year cumulative loss limits our ability to use projected income beyond 2020 in the analysis.  Based on this analysis, we have concluded that a valuation allowance is necessary for our deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences and recorded a valuation allowance of $4.9 million for the three months ended March 31, 2020, of which $2.3 million was recorded in the condensed consolidated statement of operations and the balance was recorded in shareholders' equity within accumulated other comprehensive income (loss).  We recognized this allowance entirely in the first quarter of 2020 as it relates to realized and unrealized capital losses during the quarter that are treated as a discrete item.  The effective tax rate can fluctuate throughout the year because estimates used in the quarterly tax provision are updated as more information becomes available throughout the year.

As a result of the factors mentioned above, and primarily the $10.1 million reserve strengthening that occurred during the third quarter of 2016, net income increased $3.4decreased $24.9 million during the third quarter of 2017 as compared to the 2016 third quarter.

- 28 -
Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016

The following table provides information regarding premiums written and earned for the nine months ended September 30 (dollars in thousands):

  2017  2016  Change 
          
Gross Premiums Written $360,558  $298,120  $62,438 
Net Premiums Written  246,459   202,764   43,695 
Net Premiums Earned  231,070   206,870   24,200 

Gross premiums written during the first nine months of 2017 increased $62.4 million (20.9%), while net premiums earned increased $24.2 million (11.7%), as compared to the same period in 2016.  The higher premiums written and earned were due to increases in sales of both commercial automobile and workers' compensation products and were consistent with the Company's growth strategy.  The difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
Premiums ceded to reinsurers on the Company's insurance business averaged 31.6% of gross premiums written for the 2017 period compared to 32.0% a year earlier.  The percentage of premiums ceded to reinsurance decreased as a result of changes in the Company's reinsurance structure.  The change in net premiums earned, compared to growth in gross premiums written, was a function of premium adjustment provisions in the Company's historical commercial automobile reinsurance treaties.  This historical reinsurance structure, which was revised in the current reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.

Net investment income during the first nine months of 2017 was 18.4% higher than the first nine months of 2016 primarily due to higher interest rates leading to higher reinvestment yields for short-duration fixed income securities, increased dividends and a 6.3% increase in average funds invested resulting from positive cash flow.  After-tax investment income increased by 18.6% to $8.9 million during the first nine months of 2017 compared to $7.5 million during the 2016 period, reflecting the aforementioned higher interest rates and reinvestment yield environment.

Net realized investment gains for the first nine months of 2017 totaled $15.5 million and resulted primarily from $8.5 million in gains from the Company's investments in limited partnerships and $7.0 million in gains from trading activities.  For the same period of 2016, overall net realized investment gains were $17.0 million, consisting primarily of $13.8 million in gains from trading activities and $3.2 million in gains from the Company's investments in limited partnerships.  Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate value of limited partnerships and, as such, should not be expected to be consistent from period to period.

- 29 -
Losses and loss expenses incurred during the first nine months of 2017 increased $42.9 million (31.1%) compared to the first nine months of 2016, resulting in a loss ratio of 78.3%, compared to a loss ratio of 66.8% during the first nine months of 2016.  The year-over-year increase in losses and loss expenses and in the loss ratio was related to significant unfavorable loss experience from prior years.  A reserve deficiency of $16.5 million developed during the first nine months of 2017 largely due to infrequent, but severe, transportation losses that occurred primarily during the first six months of 2017.

Other operating expenses for the first nine months of 2017 increased $17.9 million, or 27.8%, from the first nine months of 2016.  The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written.  The ratio of consolidated other operating expenses less commissions and other income to net premiums earned was 33.9% during the 2017 period compared to 29.1% for the 2016 period.

The effective federal tax rate on consolidated income (loss) for the first nine months of 2017 was 581.0% compared to 33.1% for the 2016 period.  The significant difference between the effective rate and the normal statutory rate was the result of the Company's operating loss through the first nine months of 2017.

As a result of the factors mentioned above, and primarily the reserve strengthening that occurred during the second quarter of 2017, net income decreased $22.2 million during the first nine monthsquarter of 2017 as2020 compared to net income of $2.7 million during the 2016 period.first quarter of 2019.


Sensitivity Analysis

Management is aware of the potential for variation from the reserves established at any particular point in time. Savings or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The majority of our reserves for losses and loss expenses, on a net of reinsurance basis, relate to our commercial automobile products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for our commercial automobile products for policies subject to certain major reinsurance treaties.

Commercial automobile products covered by our reinsurance treaties from July 2013 through June 2019 are subject to an unlimited aggregate stop-loss provision.  Currently each of these treaty years is reserved at or above the attachment level of these treaties.  For every $100 of additional loss, we are only responsible for our $25 retention. 

Commercial automobile products covered by our reinsurance treaty from July 2019 through June 2020 are also subject to an unlimited aggregate stop-loss provision.  Once the aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible for our $65 retention.  This increase in our retention compared to recent years reflects the combination of (1) a decreased need for stop-loss reinsurance protection resulting from a significant decrease in our commercial automobile subject limits profile, (2) a higher cost for this cover and (3) our confidence in profitability improvements given the limit reductions and rate increases on our commercial automobile products.

Forward-Looking Information

Any forward-looking statementsThe disclosures in this report, including without limitation, statements relating toForm 10-Q contain "forward-looking statements" (within the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisionsmeaning of the Private Securities Litigation Reform Act of 1995.  1995). All statements, trend analyses and other information contained in this Form 10-Q relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect," "intend," "project," and other similar expressions, constitute forward-looking statements.

- 25 -
Investors are cautioned that such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.  These risksstatements, many of which are difficult to predict and uncertainties include without limitation the following:  (i) the Company's plans, strategies, objectives, expectations and intentionsgenerally beyond our control.  Investors are subjectcautioned not to change at any time at the discretionplace undue reliance on these forward-looking statements that speak only as of the Company;  (ii)date hereof.  Investors are also urged to carefully review and consider the Company's business is highly competitive and the entrance of new competitors into or the expansionvarious disclosures made by us, which attempt to advise interested parties of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adverselyfactors that affect the Company's plans and results of operations;  (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commissionour business, including but not limited to, those risks"Risk Factors" set forth in Part I, Item 1A Risk of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q and our reports filed with the U.S. Securities and Exchange Commission from time to time.  Except to the extent otherwise required by federal securities laws, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof.

Factors that could contribute to these differences include, among other things:

●general economic conditions, including continued weakness of the financial markets, prevailing interest rate levels and stock and credit market performance, which may affect or continue to affect (among other things) our ability to sell our products and to collect amounts due to us, our ability to access capital resources and the costs associated with such access to capital and the market value of our investments;

●our ability to obtain adequate premium rates and manage our growth strategy;

●increasing competition in the sale of our insurance products and services resulting from the entrance of new competitors into, or the expansion of the operations of existing competitors in, our markets and our ability to retain existing customers;

●other changes in the markets for our insurance products;

●the impact of technological advances, including those specific to the transportation industry;

●changes in the legal or regulatory environment, which may affect the manner in which claims are adjusted or litigated, including loss and loss adjustment expense;

●legal or regulatory changes or actions, including those relating to the regulation of the sale, underwriting and pricing of insurance products and services and capital requirements;

●the impact of a downgrade in our financial strength rating;

●
the effects of the COVID-19 pandemic and associated government actions on our operations and financial performance;

●technology or network security disruptions or breaches;

●adequacy of insurance reserves;

●availability of reinsurance and ability of reinsurers to pay their obligations;

●our ability to attract and retain qualified employees;

●tax law and accounting changes; and

●legal actions brought against us.

Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.  You should read that information in conjunction with this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Critical Accounting Policies

A summary of our significant accounting policies that we consider to be the most dependent on the application of estimates and assumptions can be found in the Company'sManagement’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2016;2019. Changes in 2020 to our significant accounting policies, which are dependent upon estimates and (iv) other risks and factors which may be beyondassumptions, include the control or foresightadoption of new accounting guidance for the recognition of credit losses.  For discussion of the Company.  Readersnew guidance and the related changes to our accounting policy, see Accounting Policies within Note 1 - Summary of Significant Accounting Policies of this report are cautioned not to place undue relianceQuarterly Report on these forward-looking statements. While the Company believes the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Form 10-Q.

- 3026 -
Critical Accounting Policies

There have been no changes in the Company's critical accounting policies as disclosed in the Company's Annual Report on Form 10-K filed for the year ended December 31, 2016.

Concentrations of Credit Risk

The Company's insurance subsidiariesOur Insurance Subsidiaries cede portions of their gross premiums to numerous reinsurers under quota share and excess of loss treaties, as well as facultative placements.  These reinsurers assume commensurate portions of the risk of loss covered by the contracts.  As losses are reported and reserved, portions of the gross losses attributable to reinsurers are established as receivable assets and losses incurred are reduced.  At September 30, 2017,March 31, 2020, amounts due from reinsurers on paid and unpaid losses were estimated to total approximately $303$400 million.  Because of the large policy limits reinsured by the Company,us, the ultimate amount of incurred but not reported losses and loss adjustment expenses attributable to reinsurers could vary significantly from the estimate provided;this estimate; provided, however, absent the inability to collect from reinsurers, such variance would not result in changes in net claim losses incurred by the Company.us.


Off-Balance Sheet Arrangements

The Company hasWe have no off-balance sheet arrangements.


- 27 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


ThereOther than as set forth below, there have been no material changes in the Company's exposure to market risk since the disclosure in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2019.

Interest Rate Risk
We are exposed to interest rate risk on our fixed income investments. Given the anticipated duration of our liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, a 100 to 200 basis point increase in interest rates would not have a material impact on our ability to conduct daily operations or to meet our obligations and could result in higher investment income in a relatively short period of time, as short-term investments and maturing bonds could be reinvested in higher yielding securities.

The table below summarizes our interest rate risk by illustrating the sensitivity of the fair value of our fixed income investments as of March 31, 2020 to selected hypothetical changes in interest rates (dollars in thousands).

  Fair Value  
Estimated Change
in Fair Value
 
200 basis point increase
 
$
707,311
  
$
(39,545
)
100 basis point increase
  
727,083
   
(19,773
)
Current fair value
  
746,856
   
–
 
100 basis point decrease
  
766,629
   
19,773
 
200 basis point decrease
  
786,401
   
39,545
 

Our selection of the range of values chosen to represent changes in interest rates should not be construed as our prediction of future market events, but rather as an illustration of the impact of such events should they occur.  Several other factors, including but not limited to the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of the investment, currency fluctuations for non-U.S. debt holdings and other general market conditions, can impact the fair values of fixed income investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented above.


ITEM 4. CONTROLS AND PROCEDURES


The Company carried out an evaluation as of September 30, 2017,March 31, 2020 under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the "Exchange Act". Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act isis: (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company noted no change in its internal control over financial reporting that occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, theits internal control over financial reporting.

- 3128 -
PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required with respect to this item can be found in Note 10 - Litigation, Commitments and Contingencies of Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I,TEM Item 1 of this Quarterly Report on Form 10-Q and is incorporated by reference into this Part II, Item 1.


ITEM 1A. RISK FACTORS


In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of the Company's common stock, you should carefully review and consider the information contained in the Company's other reports and periodic filings that it makes with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A, "Risk Factors" in its Annual Report on Form 10-K for the year ended December 31, 2016.2019. Those risk factors could materially affect the Company's business, financial condition and results of operations. There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2019 other than as described below.

The following risk factor has been added:

The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity.

Beginning in March 2020, the global pandemic related to the novel coronavirus COVID-19 and related economic conditions began to impact the global economy and our results of operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 include the following:


●
Net premiums earned. We expect the impact of COVID-19 on general economic activity may negatively impact our premium volumes.  We did not experience a material effect in the first quarter of 2020, but the impact could be more significant in the second quarter of 2020 based on changes in the operations of our insureds including, but not limited to, the reduction in hours worked by insureds with workers' compensation coverages as well as the reduction in miles driven by commercial automobile insureds, which are the basis of premiums we receive.  This impact could further persist for the remainder of 2020 and beyond, but the degree of the impact will depend on the extent and duration of the economic contraction. 


●
Loss and loss expenses incurred.  We have not seen a material impact on our loss and loss expenses incurred in the first quarter of 2020, but we may incur higher claim and claim adjustment expenses in certain lines of business as a result of COVID-19 due to increases in frequency and/or severity of claims.  For example, we may experience elevated frequency and severity in our workers’ compensation lines related to compensable claims by workers who demonstrate that the injury or illness arose both out of and in the course of their employment.  We may also experience elevated frequency and severity in our liability coverages as a result of plaintiffs’ lawyers seeking to generate COVID-19-related claim activity against our insureds.  Additionally, the anticipated and unknown risks related to COVID-19 may cause additional uncertainty in the process of estimating claims and claim adjustment expense reserves. For example, the behavior of claimants and policyholders may change in unexpected ways, the disruption to the court system may impact the timing and amounts of claims settlements and the actions taken by governmental bodies, both legislative and regulatory, in reaction to COVID-19 and their related impacts are hard to predict. As a result, our estimated level of claims and claim adjustment expense reserves may change. We are also subject to credit risk in our insurance operations which may be exacerbated in times of economic distress.


●
Investments. The disruption in the financial markets related to COVID-19 has contributed to net realized and unrealized investment losses, primarily due to the impact of changes in fair value on our equity and fixed income investments. Our corporate fixed income portfolio may be further adversely impacted by ratings downgrades, increased bankruptcies and credit spread widening in distressed industries, such as energy, gaming, lodging and leisure, autos, airlines and retail. Our investment portfolio also includes commercial mortgage-backed securities, which could be adversely impacted by declines in real estate valuations and/or financial market disruption. Further disruptions in global financial markets due to the continuing impact of COVID-19 could result in additional net realized and unrealized investment losses, including potential impairments in our fixed income portfolio. In addition, declines in fixed income yields would result in decreases in net investment income from future investment activity, including re-investments.

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●
Liquidity. Collection of premiums, deductibles or self-insured retentions from our policyholders and reinsurance recoverables from our reinsurers may become increasingly difficult.  At the state level, insurance departments throughout the country have issued bulletins and regulations urging or requiring insurers to extend grace periods for the payment of policy premiums and to refrain from canceling or non-renewing policies for the non-payment of policy premiums for policyholders adversely affected by COVID-19. It is uncertain what impact these government mandates may have on our ability to recover unpaid premiums on the affected policies or what our obligations may be for the payment of claims made under policies for which we have not received premium payments.


●
Adverse Legislative and/or Regulatory Action. Federal, state and local government actions to address and contain the impact of COVID-19 may adversely affect us. A number of states have instituted, and other states are considering instituting, changes designed to effectively expand workers' compensation coverage by creating presumptions of compensability of claims for certain types of workers. Regulatory restrictions or requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums.


●
Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or outsourcing providers are unable to continue to work because of illness, government directives or otherwise. In addition, the interruption of our or their system capabilities could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Issuer Purchases of Equity Securities

           Approximate dollar 
        Total number of  value of shares still 
  Total number     shares purchased  available to be purchased 
  of shares purchased  Average price paid per share  
as part of program (1)
  
under the program (000s) (1)
 
July 1 - July 31  -   -   -  $- 
August 1 - August 31  -   -   -   17,500 
September 1 - September 30  84,960  $22.12   84,960   15,620 
Total  84,960       84,960  $15,620 
  
Total Number of
Shares Purchased
  
Average Price
Paid per Share
  
Total Number of
Shares Purchased
Under the Program (1)
  
Remaining Shares
Available to be Purchased
Under the Program (1)
 
January 1 – January 31
  
29,990
  
$
16.05
   
29,990
   
1,472,503
 
February 1 – February 29
  
9,200
   
14.87
   
9,200
   
1,463,303
 
March 1 – March 31
  
87,574
   
13.30
   
87,574
   
1,375,729
 
Total  
126,764
       
126,764
     

(1)
On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B Common Stock.  On August 6, 2019, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock that may be repurchased under the share repurchase program between August 6, 2019 and August 6, 2020 may not exceed $25.0 million, including a limit of up to $6.25 million per quarter.  No duration has been placed on our share repurchase program, and we reserve the right to amend, suspend or discontinue it at any time.  The share repurchase program does not commit us to repurchase any shares of our common stock.  We have funded, and intend to continue to fund, the share repurchase program from cash on hand.


ITEM 5. OTHER INFORMATION

On August 31, 2017,May 5, 2020, the Company's Board of Directors authorized(the “Board”) of Protective Insurance Corporation (the “Company”) approved a form of indemnification agreement (the “Indemnification Agreement”) between the reinstatement of its share repurchase program for upCompany and the individuals who serve or may serve from time to 2,464,209 sharestime as directors of the Company's Class ACompany (each such person, an “Indemnitee”). Under the Indemnification Agreement, the Company agrees to indemnify the Indemnitees against certain liabilities, including those arising out of, relating to, or Class B common stock.  Pursuantin connection with the fact that Indemnitee is or was a director or member of any committee of the Board. The Indemnification Agreement also provides for the advancement of expenses relating to this share repurchase program, on September 21, 2017the indemnification obligations. On May 5, 2020, the Company entered into a Rule 10b5-1 plan expiring on March 5, 2018, authorizing the repurchasesuch Indemnification Agreements with each of up to $17.5 millionits directors.

The foregoing summary of the Company's outstanding common shares, at various pricing thresholds (the "Plan").  Because repurchases under the Plan will be subject to price, market volume and timing constraints, thereIndemnification Agreement is no assurance asqualified by reference to the exact numberfull text of shares that will be repurchased, if any.  The Company may terminate the Plan at any time.Indemnification Agreement, a copy of which is filed herewith as Exhibit 10.2 and incorporated herein by reference.

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ITEM 6 (a)6. EXHIBITS

INDEX TO EXHIBITS

Table of Regulation S-K Item 601Exhibit No.

(31.1)Certification of CEO                 EXHIBIT 31.1
pursuant to Section 302 of the        Certification of CEO
Sarbanes-Oxley Act of 2002


(31.2)Certification of CFO                 EXHIBIT 31.2
pursuant to Section 302 of the        Certification of CFO
Sarbanes-Oxley Act of 2002


(32)Certification of CEO and CFO   EXHIBIT 32
pursuant to 18 U.S.C. 1350, as        Certification of CEO
adopted pursuant to Section 906   and CFO
of the Sarbanes-Oxley Act of 2002


(101)Exhibit No.Description
Amended and Restated Articles of Incorporation of Protective Insurance Corporation, incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed August 8, 2018.
Code of By-Laws of Protective Insurance Corporation, as amended effective April 14, 2020, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on April 20, 2020.
Code of By-Laws of Protective Insurance Corporation, as amended effective May 5, 2020, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on May 6, 2020.
Amendment to the Employment Agreement, effective as of May 22, 2019, by and between Protective Insurance Corporation and Jeremy D. Edgecliffe-Johnson, dated as of March 31, 2020
Form of Indemnification Agreement, by and between Protective Insurance Corporation and members of its Board of Directors, dated as of May 5, 2020
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from Baldwin & Lyons, Inc.'sProtective Insurance Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Comprehensive Income (Loss), (4) the Condensed Consolidated Statements of Shareholders' Equity, (5) the Condensed Consolidated Statements of Cash Flows, and (5)(6) the Notes to Unaudited Condensed Consolidated Financial Statements.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PROTECTIVE INSURANCE CORPORATION


 BALDWIN & LYONS, INC.Date May 6, 2020

By:
/s/ Jeremy D. Edgecliffe-Johnson
Jeremy D. Edgecliffe-Johnson
Chief Executive Officer



Date May 6, 2020

By:
/s/ John R. Barnett
John R. Barnett
Chief Financial Officer
Date    November 8, 2017By /s/ W. Randall Birchfield
                                                 W. Randall Birchfield,
                                        Chief Executive Officer & President






Date    November 8, 2017By /s/ William C. Vens
                                                                                                                                                        William C. Vens,
                                                                                                                                                        Chief Financial Officer




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